Loeb’s largest new position according to our database of filings was the 1.8 million shares of UnitedHealth (NYSE:UNH) that he had purchased by the end of June. The insurance giant has a good deal of uncertainty in its business going forward as the federal government moves towards more regulation of- and participation in- the health insurance market. As such, the stock has slightly underperformed the market in 2012 with a year to date return of 6%. On a valuation basis it looks quite cheap- trailing P/E of 11, forward P/E of 10- and the company turned in a small amount of earnings growth last quarter compared to a year ago. We don’t think that Loeb is after any kind of special situation play here; we think that he and his team believe that the regulatory risks to the company are being overstated and that it is therefore trading at a low valuation.
News Corp (NASDAQ:NWSA) was another new pick for Third Point, as the fund initiated a position of 4 million shares. News Corp has been having its own problems- legal ones- but has been moving toward a split of the company, a special situation that we have seen draw attention from other members of the investment community as well. Loeb, as well as many other hedge funds, like spinout opportunities because the management of the new company generally has greater latitude to focus on improving operations without considering the effect on other parts of a large business; in addition, management of the spun-off company is often highly incentivized to increase shareholder value. As it stands, News Corp trades at 50 times its trailing earnings and 12 times analyst expectations for next year.
The third largest new position in Third Point’s portfolio, according to the 13F, was Cabot Oil and Gas (NYSE:COG), with the fund purchasing 2 million shares during the second quarter. Cabot focuses on exploration and production of natural gas, oil, and natural gas liquids in the onshore United States, with specific geographies including the Appalachians, Texas, and Oklahoma. The company’s prospects here are tied to commodity prices, and earnings fell 34% last quarter compared to the same period in 2011. Analysts believe that the company will succeed in growing its earnings, but even the forward price-to-earnings ratio is high, at 49. This one isn’t a value stock, and cheaper opportunities are available of an investor wants to gain exposure to oil and gas. So Third Point is likely speculating on company-specific growth opportunities here.
The fund’s 2.2 million shares of another oil and gas company- Plains Exploration & Production (NYSE:PXP)- round out our list of Third Point’s four largest new positions. Plains Exploration & Production operates both onshore and offshore, and its geographies include California, the Gulf and Gulf Coast, and the Rocky Mountains. These locations may have been a bit more productive than Cabot’s recently, as Plains boasted 79% earnings growth in its most recent quarter compared to a year ago off a 10% increase in revenue. The trailing P/E here is 37, but sell-side growth expectations imply a forward earnings multiple of 15. This degree of earnings growth may be a bit sharp, but given that the company has been able to deliver growth on a historical basis we can certainly see EPS increasing next year.
Plains may still be overpriced, but we think it is a better choice than Cabot. If an investor is interested in following Loeb’s lead, however, we would advise playing the value game at UnitedHealth or the spinout game at News Corp.
