Beat the Index Funds by Imitating Dan Loeb's Favorite Stock Picks

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Includes: AAPL, AIG, AZPN, BAC, C, CIT, CVI, EBAY, HNT, KMI, LYB, MJN, MRO, NXPI, PHH, PLL, QVCA, SSCC, SUN, SWY, TSO, WHR, WMB, YHOO
by: Insider Monkey

Dan Loeb is one of the hottest hedge fund managers, returning more than 40% in 2010 after fees and expenses. His 2011 performance is better than most hedge funds. Dan Loeb’s Third Point Partners L.P. lost 2.9% in June and gained 6.3% during the first half of 2011 (See article on hedge fund returns).

Dan Loeb sold 20 stocks during the first quarter and initiated 16 new positions. The stocks that he sold lost an average of 9% during the second quarter. He sold his entire stake in Citigroup (NYSE:C), Bank of America (NYSE:BAC), AIG (NYSE:AIG), and Yahoo (NASDAQ:YHOO). Financials were among the worst performing sectors in the second quarter. The stocks he bought gained 0.9% during the same time period, beating the S&P 500’s 0.1% return.

In this article, we will focus on Dan Loeb’s largest stock picks in his 13F portfolio. The performance of these stocks is actually better than his reported returns. We don’t know Loeb’s short positions but most individual investors who follow hedge funds imitate their long positions. Here are Dan Loeb’s top 13F holdings and their performance since the end of March.

CompanyName

Ticker

value

Activity

Return

EL PASO CORP

EP

198000

New

12%

C V R ENERGY

CVI

169068

356%

6%

LYONDELLBASELL

LYB

146335

-17%

-2%

WILLIAMS COS

WMB

143428

15%

-2%

SUNOCO INC

SUN

98018

139%

-8%

N X P SEMICONDUCTORS

NXPI

97352

51%

-11%

HEALTH NET INC

HNT

91560

0%

-2%

SMURFIT STONE CONTAINER

SSCC

86962

50%

7%

APPLE INC

AAPL

69702

25%

-4%

PALL CORP

PLL

69132

243%

-2%

TESORO CORP

TSO

67075

New

-15%

C I T GROUP INC NEW

CIT

65952

0%

4%

P H H CORP

PHH

65310

-14%

-6%

LIBERTY MEDIA CORP NEW

LINTA

64160

0%

5%

MARATHON OIL CORP

MRO

53310

900%

-1%

MEAD JOHNSON NUTRITION

MJN

52137

-10%

17%

ASPEN TECHNOLOGY INC

AZPN

50966

-3%

15%

WHIRLPOOL CORP

WHR

48655

New

-4%

EBAY INC

EBAY

46560

New

4%

SAFEWAY INC

SWY

44726

New

0%

Click to enlarge


Loeb’s largest position is also a new position, El Paso (EP). This stock gained 12% despite the losses in energy stocks. This is one of the three stock picks Loeb discussed in his investor letter, which explained his rationale for this purchase. Barry Rosenstein also had nearly $550 Million in EP at the end of March. D.E. Shaw, Ken Griffin’s Citadel and Eric Mindich’s Eton Park Capital were also among EP investors.

Loeb’s second largest position also managed to beat the market by a large margin. This is also one of the three stocks Loeb discussed in his first quarter investor letter. Investors imitating Loeb’s top two positions would have returned 9% in 3 months. Eric Mindich and Ken Griffin did also invest in CVI. Ken Griffin’s Citadel was one of the top performing hedge funds so far in 2011, returning around 11%.

Dan Loeb’s best performing top stock was Mead Johnson Nutrition (NYSE:MJN). This has been a long-term holding for Dan Loeb. There are also several other prominent hedge fund managers who are bullish about MJN. Stephen Mandel, James Dinan, and Jim Simons are among these investors. Jim Simons’ large cap stock picks managed to beat the S&P 500 index by 3 percentage points during the second quarter.

We like Dan Loeb and believe that investors can beat the index funds by imitating Dan Loeb’s favorite stock picks. The regression tests we conducted at the end of 2010 also showed that Dan Loeb generated a 7% annual alpha after fees and expenses. Legendary investor Warren Buffett’s alpha was nearly zero during the same time period.


Disclosure: I am long C.