Apple Inc (AAPL), Yahoo: What Was This Infamous Activist Investor Trading in Q3?

THIRD POINTApple Inc (NASDAQ:AAPL) is a hedge fund favorite, but many managers have showed less confidence in the tech giant as of late. Interestingly, one notable investor was quite bullish on the stock last quarter. Enter Dan Loeb.

Loeb, founder and manager of New York-based hedge fund Third Point, is one of the wealthiest investors we track, as Forbes has estimated his net worth to be close to $1.3 billion. You may remember Loeb as the infamous activist investor involved in the executive drama at Yahoo! Inc. (NASDAQ:YHOO), in which the hedge fund manager successfully removed Scott Thompson from his post as CEO in May. Loeb was also instrumental in the hiring of Marissa Mayer, and has led similar campaigns at InterCept, Penn Virginia, Nabi Biopharmaceuticals, Horizon Natural Resources, and Western Gas Resources, to name a few.

While individual investors may think it foolhardy to attempt to follow the likes of Loeb in today’s markets, our studies have shown that those who mimic or “monkey,” the world’s best fund managers can beat the markets by up to seven percentage points a year. With a track record that includes year-end returns between 30%-40% as recently as 2009 and 2010, we’d classify Loeb as one of the world’s best. As you can see by looking at Loeb’s entire 13F portfolio, the hedge fund manager has a penchant for tech stocks; Yahoo and Apple Inc (NASDAQ:AAPL) combine to make up more than 40% of his holdings, which totaled $3.27 billion at the midway point of 2012. We’re going to take a closer look at some of the most important investment decisions Loeb made in the third quarter, to determine what exactly to monkey.

We can’t start an analysis of Loeb’s portfolio without mentioning Yahoo, and after accounting for $1.1 billion of the manager’s 13F portfolio in the second quarter, his position in the tech giant increased last quarter. A boost of 3.5%, Third Point now holds a little over 73 million shares of Yahoo, worth a market value of $1.3 billion. Third Point now holds more than 6% of Yahoo’s outstanding shares, which have performed quite well over the past month, unlike those of Apple Inc (NASDAQ:AAPL).

After trading between $15 and $16 a share for much of 2012, Yahoo’s stock price has recently broken out above this range, and now flirts with $18 a share. The major catalyst for this bullish performance was the company’s impressive third quarter financials, in which it beat the Street’s revenue and earnings forecasts. The key number was an adjusted EPS of 35 cents, versus consensus of 26 cents a share. Sell-side analysts now expect Yahoo to generate earnings growth of 11.7% a year over the next half-decade, compared to the 9.6% clip it has experienced since 2006. Despite the potential for accelerated EPS growth, shares of Yahoo still trade at a bargain bin P/E of 5.4X and a PEG of 0.46.

Loeb also holds quite a bit of Apple Inc (NASDAQ:AAPL) in his fund, and despite drawing the ire of many big time managers, the stock’s position was increased last quarter. After holding 425,000 shares of the Cupertino-based tech company in Q2, Loeb reported a 710,000 share position in Q3, an increase of more than 67.0%. You’re probably familiar with the stock’s recent under-performance, so we’ll save you the long recap. In short, Apple has lost more than 23% of its market value over the past two months, after fourth quarter earnings largely disappointed Wall Street’s expectations.

Now, the company trades at ridiculously attractive valuation metrics, including a forward P/E of 9.1X and a PEG of 0.58, but we believe Apple needs a catalyst to boost its shares to a fairer multiple. Ardent investors should look to any potential news of a China Mobile deal as an enormous positive, though a strong first quarter will do the trick as well. Analysts expect Apple Inc (NASDAQ:AAPL) to finish Q1 with an EPS of $13.55. Full-year 2013 EPS estimates average $49.57, a 12.3% increase year over year.

Despite his upped stakes in Apple and Yahoo, Loeb wasn’t an outright bull in the third quarter. The hedge fund manager downsized his position in Delphi Automotive PLC (NYSE:DLPH), and sold off his entire holdings of J.C. Penney Company, Inc. (NYSE:JCP) and DISH Network Corp. (NASDAQ:DISH). Delphi Automotive, the large cap auto parts manufacturer, has returned nearly 50% in 2012 alone, on the back of increased demand for its electronics products in the Far East.

In its most recent earnings release, Delphi beat the Street’s earnings estimates, coming in with a third quarter EPS of 84 cents, up from the 79-cent mark it posted a year ago, and far above the average analyst consensus of 73 cents a share. The company did cut its Q4 earnings guidance to $0.79-$0.89 as analysts were forecasting a 99-cent EPS, but results in the top range of these estimates would still trump last year’s Q4 mark of 88 cents a share. Delphi currently sports a solid five-year expected EPS growth rate of 15.8%, but trades at a measly PEG ratio of 0.54. It’s possible that Loeb was selling some of his Delphi stake because of the guidance cut, but we still like the company in terms of its valuation.

JC Penney and DISH Network, two stocks that Loeb sold off, have had vastly different experiences in 2012. The former, which appointed former Apple Inc (NASDAQ:AAPL) executive Ron Johnson as CEO in the summer of last year, is attempting quite the transformation. JC Penney has ditched most of its coupon sales, replacing them with an “Every Day” pricing model that Johnson is hoping will give customers more clarity. In addition to this structural change, the retailer is implementing a new store-within-a-store model, that will create individual “shops” within JC Penney itself. On the earnings front, the company has posted a loss in each of the past three quarters, reporting an adjusted loss of 93 cents a share in Q3 versus a profit of $0.18 one year earlier. It’s likely that Loeb isn’t expecting a turnaround anytime soon, and we question if you should either.

DISH Network, meanwhile, was the fifteenth largest holding in Loeb’s portfolio at the end of the second quarter, as the hedge fund manager held more than $57 million worth of the pay-TV company. DISH has experienced solid appreciation in 2012, gaining more than 20% since the start of the year, but did post disappointing third quarter earnings earlier this month. Compared to consensus estimates of $251 million in profit, DISH’s latest Q3 results amounted to a loss of $158.5 million, amid its widely publicized dispute with AMC Networks and net subscriber losses of 19,000. CNBC has speculated that this may have “put the company in a better position to retry a merger with DirecTV,” which was originally attempted in 2002. If Loeb’s outright sale in Q3 is any indication though, the hedge fund manager isn’t expecting a deal to gain antitrust approval if it were proposed again.

To recap: if you’re looking to monkey Dan Loeb’s latest 13F, your best play might be to make similar ‘confidence bets’ in Apple Inc (NASDAQ:AAPL) and Yahoo, though it’d be smart to ignore any contrarian desires when considering JC Penney or DISH. Delphi, meanwhile, did cut next quarter’s guidance, but the auto parts company is still expected to generate solid earnings growth at an attractive valuation. We still like the company despite Loeb’s bearish bet.

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