Third Point’s Portfolio Struggled in the Turbulent Third Quarter

Dan Loeb is one of the most revered activist investors on Wall Street, and has proven to be a successful money “generator” over his 20 years of experience as a hedge fund manager. He founded Third Point LLC in 1995 with $3.4 million in capital, and it currently has assets under management of roughly $17 billion. Third Point has delivered an annualized return of 20.5% since its inception through the end of the second quarter, outperforming the S&P 500 by more than 11% over the same time span. The investment firm’s track record represents one of the main reasons the Insider Monkey team monitors the moves made by this hedge fund. However, Third Point took a serious hit in the third quarter, when the broader market lost 6.94%. According to our calculations, the hedge fund’s 37 positions in companies with a market capitalization of at least $1 billion posted a weighted average negative return of 13.49%, pushing to year-to-date loss to 8.3%. Even so, this figure does not represent Third Point’s actual returns during the latest quarter, as this estimate takes into account only a portion of its holdings. Let’s now refocus our discussion on Dan Loeb’s most prominent stock picks and their performance during the third quarter.

Hedge funds have been underperforming the market for a very long time. However, this was mainly because of the huge fees that hedge funds charge as well as the poor performance of their short books. Hedge funds’ long positions performed actually better than the market. Small-cap stocks, activist targets, and spin offs were among the bright spots in hedge funds’ portfolios. For instance, the 15 most popular small-cap picks among hedge funds outperformed the market by more than 53 percentage points since the end of August 2012 (read more details here). This strategy also managed to beat the market by double digits annually in our back tests covering the 1999-2012 period.

Dow Chemical Co (NYSE:DOW) represented the second-largest holding of Third Point at the end of the second quarter, consisting of exactly 23 million shares valued at $1.18 billion. This position accounted for 11.02% of the investment firm’s portfolio on June 30. The stock lost 16.31% in the third quarter, but it has embarked on a steady uptrend since the end of three-month period and gained more than 12% so far. According to a recent article published by Reuters, Dow Chemical Co (NYSE:DOW) anticipates to triple its revenues from Africa over the next five-year period. The inorganic chemicals company has spotted multiple avenues for growth on the continent and has been investing heavily to achieve the aforementioned target. The chemicals stock also generates an attractive dividend yield of 3.53%, which could serve as another reason for investing in the company. Daniel S. Och’s OZ Management is the second-largest stockholder of Dow Chemical Co (NYSE:DOW) within our database, holding 12.10 million shares as of June 30.

eBay Inc. (NASDAQ:EBAY) also made the top five largest holdings list of Third Point at the end of the June quarter. Dan Loeb’s hedge fund disclosed owning 19.01 million shares in the tech company through its latest 13F filing, which were valued $481.92 million. However, the stake in eBay Inc. (NASDAQ:EBAY) was reduced by 2.38 million shares during the second quarter. The shares of eBay posted a third-quarter loss of 3.60%, but they are still nearly 4% in the green year-to-date. The e-commerce company is set to release its first earnings report after spinning-off Paypal Holdings Inc. (NASDAQ:PYPL) after the market close on Wednesday. Analysts polled by Thomson Reuters anticipate eBay to post earnings per share of $0.40 and revenue of $2.1 billion for the third quarter. The company reported non-GAAP adjusted earnings per share of $0.68 and revenue of $4.35 billion for the same period a year ago. Carl Icahn’s Icahn Capital LP is by far the largest shareholder of eBay Inc. (NASDAQ:EBAY) among the hedge funds tracked by our team with 46.27 million shares.

On the next page of the article we will be discussing the other three stock picks of Third Point LLC.

Let’s move on to Sunedison Inc. (NYSE:SUNE), which saw its stock price lose 76.00% in the third quarter. Third Point increased its position in the solar company during the second quarter by 2.4 million shares, and owned 12.40 million shares that were worth $370.88 million on June 30. The shares of Sunedison Inc. (NYSE:SUNE) are 53% in the red year-to-date, but some tend to believe in a potential rebound. One of the bullish players on Sunedison is short-seller John Hempton’s Bronte Capital, which reckons that the company’s existing projects have a great deal of potential. Even though Hempton is not entirely sure that the solar company will not file for bankruptcy, he does believe that the stock represents a great opportunity (read more details). David Einhorn’s Greenlight Capital represents the largest stockholder of Sunedison Inc. (NYSE:SUNE) within our database, holding 24.84 million shares.

Third Point owns nearly 3.58 million shares of Yum! Brands Inc. (NYSE:YUM) as of June 30, which were valued at $322.04 million. The shares of the restaurant chain lost 10.85% in the third quarter and has lost an additional 9% since then amid a disappointing third-quarter earnings report that was released earlier this month. Earlier this week, Keith Meister of Corvex Management LP was appointed to Yum! Brands Inc. (NYSE:YUM)’s Board of Directors, and he will surely put a great deal of effort to create shareholder value. The company’s China business has had a hard time recovering from last July’s supplier incident, which has put downward pressure on the stock and the company’s top-line. Let us remind you that the activist investor has previously expressed his conviction that a potential spin-off of its China business would unlock great shareholder value (read more details here). Corvex Management LP is the top shareholder of Yum! Brands Inc. (NYSE:YUM) within our database, owning 15.29 million shares as of June 30.

Lastly, Third Point held its position in Sothebys (NYSE:BID) unchanged during the second quarter at 6.65 million shares, which was worth $300.85 million at the end of June. The shares of the auctioneer of authenticated fine art, decorative art, and jewelry lost 29.11% over the latest quarter, and are 22% in the red year-to-date. For the second quarter that ended 30 June, Sothebys (NYSE:BID) reported revenues of $332.0 million, which were down 1% year-over-year. The currency exchange rates significantly impacted the company’s top-line. In fact, the revenue excluding the impact of currency fluctuations increase by $8.6 million or 3% year-over-year Ricky Sandler’s Eminence Capital added a 1.75 million-share position in Sothebys (NYSE:BID) during the June quarter.

Disclosure: None