Dan Loeb of Third Point has become a billionaire due to his success in both value investing and as an activist shareholder. The most comprehensive picture of what Third Point or any other hedge fund owns comes in the form of quarterly 13F filings (see the list of stocks Third Point most recently reported owning); we use these disclosures to analyze individual managers’ stock picks as well as to develop investment strategies (for example, we have found that the most popular small cap stocks among hedge funds provide an excess return of 18 percentage points per year). We can also see which stocks a hedge fund likes according to a number of screens for sector or for valuation. Here are Loeb’s five largest positions by market value in stocks with both trailing and forward P/E multiples less than 14:
Delphi Automotive PLC (NYSE:DLPH) was one of Loeb’s top stock picks overall, with the 13F reporting a position of 10 million shares. Delphi, an auto parts manufacturer specializing in electrical, electronic, and powertrain systems, experienced a decline in earnings last quarter compared to the fourth quarter of 2011 primarily due to reduced margins. Auto related companies are of interest to many value investors who point to a historically old U.S. consumer auto fleet and to low earnings multiples- in Delphi Automotive PLC (NYSE:DLPH)’s case, the trailing P/E is 13. Analyst expectations have it priced at 9 times forward earnings estimates.
Third Point added shares of Murphy Oil Corporation (NYSE:MUR) during the fourth quarter of 2012 and closed December with a total of 6.2 million shares in its portfolio. Loeb has suggested that the integrated oil and gas company spin out one or more of its business units, such as its retail gas stations. The stock carries trailing and forward P/E multiples of 12 and 10, respectively, but spinouts often have the effect of creating shareholder value as management becomes better able to focus on the new business’s core operations. We’d suggest following the stock but not buying unless there are further positive developments.
The fund initiated a position of 3.7 million shares in Tesoro Corporation (NYSE:TSO), an $8 billion market cap company which operates midstream energy assets and retail gas stations. Loeb’s stated thesis here has been that investors are undervaluing many of Tesoro Corporation (NYSE:TSO)’s refining assets including a new acquisition of a refinery previously owned by BP. The stock has already more than doubled from its levels a year ago, but is still arguably cheap at an enterprise value of 4x trailing EBITDA and earnings multiples of around 10 as well. The five-year PEG ratio is 0.8 as the sell-side expects significant earnings growth.