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Dan Loeb’s Top Stock Picks

THIRD POINTAt odds with his New York bred-and-born billionaire counterparts, Dan Loeb grew up in Santa Monica, California. Still an avid surfer in his fifties, Loeb makes time to catch some waves when he’s not writing scathing public letters that disapprove of company performance and executive conduct as a shareholder activist. Some of Loeb’s noteworthy activity surrounded Intercept, Star Gas, and now Yahoo!. In 2004, Third Point acquired 7.1% of InterCept, whereby Loeb sent a letter demanding that InterCept chairman and CEO John Collins resign along with board members and sell the company. In 2005, Third Point acquired a 6% stake in Star Gas, whereby Loeb again sent a letter demanding that President and CEO Irik Sevin resign. Offering no mercy Loeb wrote, “I have known you personally for many years and thus what I am about to say may seem harsh, but is said with some authority. It is time for you to step down from your role as CEO and director so that you can do what you do best: retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites.”

Dan Loeb’s Third Point Offshore fund returned 3.7% during the first 5 months of 2012. Here are his top 10 holdings at the end of March:

Company Ticker Value ($000s) Activity
YAHOO INC YHOO 1,073,016 26%
DELPHI AUTOMOTIVE PLC DLPH 417,990 New
SARA LEE CORP SLE 221,221 32%
APPLE INC AAPL 217,037 New
UNITED TECHNOLOGIES CORP UTX 182,468 New
GOOGLE INC GOOG 179,547 New
MARVELL TECHNOLOGY GROUP LTD MRVL 145,503 -8%
MEDCO HEALTH SOLUTIONS INC MHS 140,600 New
FAMILY DOLLAR STORES INC FDO 136,052 New
CAPITAL ONE FINANCIAL CORP COF 119,841 New

This quarter, Loeb initiated positions in a big way with 6 of his top 10 holdings as new additions. They include Delphi (DLPH), Apple (NASDAQ:AAPL), United Technologies (UTX), Google (GOOG), Medco Health (MHS), Family Dollar (FDO), and Capital One (NYSE:COF). We believe that COF is superior to ING Group (ING), American Express (NYSE:AXP), and Discover Financial Services (NYSE:DFS), especially from a valuation standpoint. COF trades at ~7.9x 2013 earnings, which is below AXP, which trades at ~11.8x and DFS which trades at ~9.1x. The peer group at large trades at ~10.2x. The Comprehensive Capital Analysis and Review (CCAR), which stress tests and reviews capital plans of the 19 largest U.S. bank holding companies reported AXP, DFS and COF had minimum Tier 1 Common capital ratios above the 5% minimum—COF reported 7.8%, a strong number. And though COF shares have done very well YTD, we think there could be additional upside if management executes a smooth integration for ING Direct and HSBC Card operations and continues to increase loan growth. Until the uncertainty around ING selling its 9.7% stake in COF (worth an estimated $3 billion) lifts, we are sitting out on ING. Billionaire John Paulson and Edward Lampert are the top two holders of COF among the nearly 400 hedge funds we are tracking (see John Paulson’s stock picks).

Loeb added to positions in Yahoo! (NASDAQ:YHOO), unsurprisingly given his shareholder activist stance in the company, and Sara Lee (SLE), the diversified consumer goods company. Loeb applied similar pressure to YHOO CEO, Scott Thompson, as he did to Collins and Sevin, regarding a discrepancy in his college degree. Scott Thompson resigned and Loeb got on Yahoo’s board recently. Third Point has a 5.81% stake in Yahoo!. We think it is too late to invest in Yahoo for the short-term and it is too early to invest for the long-term. We like Loeb’s recent Apple bets. Apple was his fourth largest position at the end of May. Loeb actually sold out of his Apple stake when the stock was trading less than $350 during the second quarter of 2011. He repurchased these shares at around $440 during the first quarter of this year. Apple is the most popular stock among hedge funds (see the 10 most popular stocks). The stock gained around 30% since Loeb bought it in early this year. In terms of a sector breakdown, Third Point is over 40% in Technology, about 16% in Consumer Goods, and about 10% in Consumer Services.

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