By Douglas Ehrman
Daniel Loeb’s Third Point LLC, which has an estimated $2.3 billion under management, is considered a major institutional investor capable of moving markets. Within the investing community, Mr. Loeb is known for his outspoken disapproval of the conduct of other investment professionals and of his strong financial performance. For each of these reasons, his trades and opinions are carefully monitored and can, from time to time, provide some insight into developing trends in either the names he chooses, or the broader market in general. The fact that Mr. Loeb tends to be outspoken in many areas can be combined with his disclosure to form a reasonable opinion of his market stance overall.
Tesoro Corp. (TSO) – As of the end of the first quarter of 2011, Mr. Loeb initiated a position in TSO, bringing his holding size to 2.5 million shares at an estimated average purchase price of $22.14 per share; this resulted in a portfolio weight for TSO of 2.9%. At current levels, TSO looks extremely attractive across a variety of key financial metrics. Trading a trailing price-to-earnings multiple of 7.9 relative to 9.8 for Exxon Mobil (XOM) and 17.8 for Valero Energy Corp (VLO), the shares look cheap. When growth is added to these metrics for each company, the case looks even more compelling at price-to-earnings over growth for the three respectively at 0.22 for TSO, 1.27 for XOM and 1.04 for VLO; a reading below 1 is generally considered attractive. While the operating margin is not as robust as it is for XOM at 12.7%, it is competitive at 3.3% with VLO at 2.5%.
Xerium technologies, Inc. (XRM) – As of the end of the first quarter of 2011, Mr. Loeb added to his holding of XRM, increasing his position size by 18.35%; this resulted in a portfolio weight for XRM of 0.28%. Operating in the Paper and Paper Products segment, XRM looks like a growth bet in the microcap space. With a total market capitalization of under $215 million, and the small percentage that XRM represents to Mr. Loeb’s portfolio, if the company performs it can aid performance, while if it does not, it should have little impact. Therefore, the risk/ return profile looks very attractive. By the numbers, the company has an attractive price-to-earnings over growth (PEG) ratio of 0.21 relative to 0.96 for Albany International Corp. (AIN), a close competitor. When coupled with an operating margin of 12.2% (relative to 11.1% for AIN), the company makes sense as a buy.
El Paso Corp. (EP) – As of the end of the first quarter of 2011, Mr. Loeb initiated a position in EP, bringing his holding size to 11 million shares at an estimated average purchase price of $16.38 per share; this resulted in a portfolio weight for TSO of 8.56%. EP operates in the natural gas space and has strong metrics. Using United States Natural Gas (UNG) as a proxy, the most liquid natural gas ETF (exchange traded fund), the commodity looks poised for a significant upside move –UNG has traded in a tight range for the past eighteen months and is currently trading near the bottom of the range. Despite the fact EP has an elevated price-to-earnings ratio of 33.9, the real appeal of this stock is in the operating margin. EP has a reported operating margin of 36.4% relative to 3% for DCP Midstream Partners (DPM), 12.7% for Exxon Mobil (XOM), and 17.4% for Williams Companies, Inc. (WMB).
CVR Energy, Inc. (CVI) – As of the end of the first quarter of 2011, Mr. Loeb added to his holding of CVI, increasing his position size by 356.25% at an estimated average purchase price of $18.36 per share; this resulted in a portfolio weight for CVI of 5.71%. CVI operates in the Oil and Gas Refining space and is a pure industry play. With a price-to-earnings over growth (PEG) ratio of 0.34, the company looks attractive as a growth play for the future. The bulk of CVI’s competitors are private, so that makes this a good way to play the sector.
Pall, Corp. (PLL) – As of the end of the first quarter of 2011, Mr. Loeb added to his holding of PLL, increasing his position size by 242.9% at an estimated average purchase price of $53.52 per share; this resulted in a portfolio weight for PLL of 2.12%. PLL operates in the diversified machinery segment, with a focus on Life Sciences products. With the focus that has been put on health care by the current administration, any further developments in government funding may serve as an additional catalyst for the stock. In the absence of a specific catalyst, the stock remains attractive with an operating margin of 17.9% and a return on equity (ROE) over 20%. When compared to companies like United Technologies (UTX), the company has an attractive profile given its specific focuses.
Marathon Oil Corp. (MRO) – As of the end of the first quarter of 2011, Mr. Loeb added to his holding of MRO, increasing his position size by 900% at an estimated average purchase price of $46.55 per share; this resulted in a portfolio weight for MRO of 2.07%. Where MRO really excels and differentiates itself from competitors is in its comprehensive vertical integration. The company is well positioned across the supply chain and should be poised to perform heading into the winter driving months. On sheer valuation, the stock appears to offer a significant value relative to its peers, trading at a trailing price-to-earnings ratio of 5.8; Chevron Corp. (CVX) is trading at a trailing price-to-earnings ratio of 8.7, while Exxon Mobil (XOM) trades at 9.8. Even when the growth element is included (price-to-earnings over growth (PEG)), the company excels: MRO has a PEG of 0.97 relative to 1.53 for CVX and 1.27 for XOM. Both in terms of industry positioning, and using key financial metrics as a guide, MRO is well positioned to perform.