By Guan Wang
Dan Loeb founded the New York-based hedge fund Third Point in 1995. Currently, the fund has approximately $7.5 billion AUM. Loeb is a pioneer in activist investing, which, owing to the large size of many of his positions, makes it relatively easier for investors to imitate his investments.
Loeb is also an outspoken investor, known for writing public letters about other financial executives. For example, the misstatement in the academic record of Yahoo's Scott Thompson might not have been noticed by the public if Loeb had kept silent. With regard to Loeb's performance as a fund manager, the value investor made $150 million, $200 million, and $270 million respectively from 2005 to 2007.
In 2010, Third Point's flagship fund returned 41.7%. It was down 0.1% in 2011, but the average hedge fund lost 5% during that year. Loeb recently reported his 13F holdings as of March 31, 2012 (check out Dan Loeb's top holdings). Let's take a closer look at the most bullish bets of this value investor.
Yahoo Inc (YHOO) was the largest position in Loeb's latest 13F portfolio. Ever since Loeb discovered the resume issue, Third Point has been pressing Yahoo for new CEO. According to WSJ, Third Point asked Yahoo to allow a Third Point nominee to be chairman of a new CEO search committee and bring on Third Point's entire slate of board candidates. According to Loeb, "Third Point has over $1 billion invested in Yahoo and we take no joy in witnessing this carnage. This board's unchecked value destruction must stop once and for all."
Yahoo accepted Loeb's requests. He also believes that his own team will be able to improve Yahoo's business. Over the first quarter, Loeb increased his position in Yahoo by 26% to $1.07 billion. Other hedge funds also showed interest in Yahoo. At the end of the first quarter, there were 60 hedge funds with Yahoo positions in their 13F portfolios. Richard Perry's Perry Capital had nearly $200 million invested in Yahoo at the end of March, while Jim Simons' Renaissance Technologies initiated a new $27 million position in Yahoo during the first quarter (check out Jim Simons' top stock picks).
We like Yahoo. Though its upper management team has experienced dramatic changes over the past year, we still see lots of positives with the company. We expect its Asia restructuring plans to unlock great value, and we think it will benefit from its search/advertising deal with Microsoft Corp (MSFT) over the long term. Its strong balance sheet will support its share repurchase program, which will, in turn, continue to boost its EPS.
Loeb's second-largest position at the end of March was Delphi Automotive Plc (DLPH). It was a new position in Loeb's portfolio. During the first quarter, he initiated a new $418 million position in Delphi. The stock was also quite popular amongst hedge funds. As of March 31, 2012, there were 40 hedge funds reporting to own Delphi in their 13F portfolios. John Paulson was the most bullish hedge fund manager on Delphi. Paulson & Co had $1.4 billion invested in this stock at the end of March (check out John Paulson's top stock picks).
Delphi has attractive valuation levels. Analysts expect the company to make $3.84 per share in 2012 and $4.32 per share in 2013, making its P/E ratio for 2013 only 6.4, which is considerably lower compared with most of its competitors. Other large auto parts manufacturers include BorgWarner Inc (BWA), Johnson Controls Inc (JCI), and Magna International Inc (MGA). All these companies are trading at higher multiples compared with Delphi. BorgWarner's 2013 P/E ratio is 11.5, Johnson Controls' is 9, and Magna's is 7.4. These three stocks are also less popular among hedge funds compared with Delphi.
However, while Delphi seems to be one of the best auto parts stocks, we think auto manufacturers are better options than auto parts manufacturers. On the average, the former has even lower valuation levels. For example, General Motors (GM) is trading at only 4.6X its 2013 earnings.
Over the first quarter, Loeb also opened new positions in Apple Inc (AAPL) and United Technologies Corp (UTX). Loeb did not disclose owning any shares of both stocks at the end of last year. As of March 31, 2012, Loeb had $217 million invested in Apple and $182 million invested in United Technologies. We love Apple. It is attractively priced at 14X its 2011 earnings, with an expected annual earnings growth rate of over 20%.
United Technologies also has a double-digit expected earnings growth rate of 11.43% and is trading at 13X its 2011 earnings, but we think another conglomerate stock - General Electric (GE) - is a better bet than United Technologies. We expect GE's industrial operations to remain strong and we see robust growth in its long-cycle energy and technology businesses (check out our previous article about GE vs. United Technologies).