In this article, we discuss billionaire Dan Loeb’s top 10 stock picks.
Dan Loeb’s Hedge Fund’s Returns
Daniel Seth Loeb is an American billionaire and hedge fund manager who founded Third Point Management in 1995. As of the end of 2020, the New York-based hedge fund has over $13 billion in managed securities. The 59-year-old billionaire whose worth stands at $3.6 billion proved his stock-picking skills in 2020 as his hedge fund gained 7.2% in December and 20.6% in 2020. When the hedge fund industry was getting clobbered by the short squeeze initiated by retail and Reddit investors, Third Point was gaining as the fund returned 1.9% in January.
Talking about the GameStop drama in his latest letter to investors, Loeb said:
“In addition, after a few previous painful experiences of our own taking positions against companies with large short interests, we had a preview of what can happen and cut our losses. Since then, we have mostly avoided taking short stakes in companies with modest liquidity and large short interests.”
Dan Loeb’s Investment Strategy
Raised in Santa Monica, California, Loeb graduated from Columbia University with an economics degree. Business and entrepreneurship run in his family. His father was a general counsel for retailer Williams-Sonoma. His father also served as an outside director of Mattel, Inc. and became the interim President of Mattel. Loeb’s great-aunt Ruth Handler co-founded Mattel Inc.
Loeb is an activist investor known for initiating positions in companies and launching board shakeups and forcing managements to improve performance. He has an eye for inefficiencies that prevent companies from reaching their true potential. He successfully launched corporate battles and enforced key changes at major companies including Yahoo!, Sony, Sotheby’s and Ligand Pharmaceuticals.
After buying over $1 billion stake in Intel, Loeb plans to shake up the company and see some changes. Here’s a paragraph from his scathing letter to Intel’s management:
“We cannot fathom how the boards who presided over Intel’s decline could have permitted management to fritter away the company’s leading market position. Stakeholders will no longer tolerate such apparent abdications of duty.”
Dan Loeb’s Comments On How He Started Third Point and His Own Investment Approach
“At Third Point, we have a different culture which is one, based on teamwork, cooperation, and a real focus on the back to the investor coming first, but a real focus on what’s good for the whole firm, and how we are going to be successful as a firm. So what does that do? It prevents courting of information, it prevents people from backbiting against other people from doing a lot of bad behaviors. What does it create? It creates people that are supporting each other… Things like teamwork, transparency, honesty, creativity. In terms of how do we invest, just to take it down a level, we have a value-based philosophy. We are not momentum guys, we’re also not macro guys. We invest in things where there’s a fundamental analytical framework that we can understand, pretty much explain using third or fourth grade math, and with a set of dynamics that we also understand, probably a higher level of legal analysis and accounting analysis, and then regulatory analysis as well.
The transition initially from Citigroup to starting my own company, I used to write down ‘Third Point’ over and over on a piece of paper for years. I used to just fantasize about starting my fund and how I would name it, Third Point Capital, Third Point Management, then I do logos. This was really a dream of mine to get this thing going. So I left Citi in February, and the transition was just really to make sure I had some capital. Luckily, a good friend of mine who was a wealthy individual who promised to give me about a million and a couple of hundred grand. I didn’t have a wealthy family but at least, they were in position. My parents, and other people gave me a couple hundred thousand dollars each. So that was really the start of Third Point.
The night before I started investing, I absolutely panicked. I thought, ‘Oh my God. What am I doing?’ I’m up back to stories again and said, ‘I’m a fraud. I’m a fraud. There’s no way I get other people have entrusted me with their money.’ Then I was up 8% the first month and I did not have that fraud feeling again. It crops up every now and then, you have a bad day or a bad month even after 10 years.”
Dan Loeb’s returns stand out in the hedge fund industry which is otherwise struggling. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Let’s start our list of billionaire Dan Loeb’s top 10 stock picks.
10. Intuit Inc. (NASDAQ: INTU)
Value: $379,850,000
Percent of Dan Loeb’s 13F Portfolio: 2.92%
Number of Hedge Fund Holders: 68
Intuit is behind several famous software products used for accounting, tax and finance. The company’s products include TurboTax, personal finance app Mint and QuickBooks. Intuit stock is up 75% over the last 12 months. Mizuho recently gave bullish comments about Intuit along with several other software stocks, citing an increasing demand and a recovery in spending. The firm has a $450 price target for the company.
As of the end of the fourth quarter, 68 hedge funds in Insider Monkey’s database of 887 funds held stakes in Intuit Inc., compared to 54 funds in the third quarter. Fundsmith LLP is the biggest stakeholder in the company, with 4.5 million shares, worth $1.7 billion.
In their Q3 2020 investor letter, L1 Capital International Fund highlighted a few stocks and Intuit Inc (NASDAQ:INTU) is one of them.
Here is what L1 Capital International Fund said:
“Intuit epitomises the consistency, predictability and longevity of growth we seek in high quality businesses.
Intuit currently operates through 2 main divisions:
- Software for financial and business management as well as integrated payroll solutions, merchant payment processing solutions, and financing for small businesses in the US and key global markets; and
- Do‑it‑yourself and assisted income tax preparation software products and services sold in the U.S. and Canada.
Intuit also provides personal financial software and services through its Mint and Turbo products and has announced the acquisition of Credit Karma for US$7.1 billion which will significantly expand its personal finance capabilities, creating a third leg to Intuit’s growth stool.
9. Burlington Stores, Inc. (NYSE: BURL)
Value: $436,788,000
Percent of Dan Loeb’s 13F Portfolio: 3.36%
Number of Hedge Fund Holders: 29
New Jersey-based Burlington Stores is a major department store company. The stock is up 144% over the last 12 months. The stock recently reached its 52-week high after the company posted upbeat Q4 results, with a 3.4% revenue growth even without a strong ecommerce channel. The company also increased its new store target to 2,000 from 1,000.
According to our database, the number of BURL’s long hedge funds positions decreased at the end of the fourth quarter of 2020. There were 29 hedge funds that hold a position in Burlington Stores compared to 30 funds in the third quarter. The biggest stakeholder of the company is Adage Capital Management, with 2.08 million shares, worth $544.8 million.
8. Alphabet Inc. (NASDAQ: GOOG)
Value: $455,686,000
Percent of Dan Loeb’s 13F Portfolio: 3.51%
Number of Hedge Fund Holders: 157
Alphabet ranks 8th on the list of billionaire Dan Loeb’s top 10 stock picks. Other hedge funds are also loading up on Alphabet. Insider Monkey’s database of about 900 hedge funds show that 179 elite funds ended the fourth quarter with Alphabet stock on their portfolios, compared to 162 funds a quarter earlier. The collective value of these stakes is over $21 billion. Among the notable hedge funds that are buying Google stock include Tiger Cub Lee Ainslie.
In their Q4 2020 investor letter, Bretton Fund highlighted a few stocks and Alphabet Inc. (NASDAQ:GOOG) is one of them. Here is what the fund said:
“Google (aka Alphabet) was one of our best performing stocks last year, returning 30.9%, while its earnings per share increased 19%. As lockdowns first went into place in the spring, many advertisers hit pause on their campaigns, waiting—like a lot of us—to see what the world would look like. And then—like a lot of us—advertisers adjusted. Travel companies cut back their campaigns, while ads for other goods, like athleisure wear and video games, picked up the slack. Google had a rough second quarter, but was back in the swing of things by the next quarter.”
7. Amazon.com, Inc. (NASDAQ: AMZN)
Value: $472,255,000
Percent of Dan Loeb’s 13F Portfolio: 3.64%
Number of Hedge Fund Holders: 273
Billionaire Dan Loeb slashed his stake in Amazon by about 30% in the fourth quarter, ending the period with 145,000 shares of the company, worth $472.25 million. Evercore ISI recently said that Amazon is in a better position to offset the effects of the possible hike in federal minimum wage amid its tech efficiencies and higher sales per employee. Amazon is one of the 30 most popular stocks among hedge funds, as of the end of the fourth quarter.
6. Charter Communications, Inc. (NASDAQ: CHTR)
Value: $496,162,000
Percent of Dan Loeb’s 13F Portfolio: 3.82%
Number of Hedge Fund Holders: 90
Charter Communications Inc. ranks 6th on the list of billionaire Dan Loeb’s top 10 stock picks. The fund left its position in the company unchanged in the quarter, with 750,000 shares, worth $496.16 million. In the fourth quarter, the broadband company added 246,000 connections, down from 339,000 adds in the same period last year. Total new customer relationships added in the period came in at 197,000, compared to 268,000 additions a year earlier. Revenue in the quarter, however, jumped 7% to total $12.62 billion, beating the Street’s estimate by $50 million.
A total of 90 hedge funds tracked by Insider Monkey were bullish CHTR at the end of the fourth quarter, up from 88 funds a quarter earlier. Chris Hohn’s TCI Fund Management is the biggest stakeholder of the company with 10.4 million shares, worth $6.9 billion.
Avenir Capital said in their Q4 2020 letter that Charter Communications, Inc. (NASDAQ: CHTR) was one of their biggest gainers. Here is what Avenir Capital has to say about Charter Communications, Inc. in their investor letter:
“Our third biggest gainer was Charter Communications, the U.S. broadband connectivity business. Our opportunity to buy Charter came in early 2018 when the business was sold off heavily on fears of cable TV cord cutting and the impact of streaming businesses such as Netflix on traditional cable. We felt the bulk of Charter’s underlying value came from its broadband internet business, a highly concentrated industry in which Charter holds a dominant position, not the traditional cable TV business. Charter’s share price has increased by 112% since our initial purchase at US$313 per share, including an increase of 35% in 2020 to end the year at US$665 per share.”
5. Upstart Holdings, Inc. (NASDAQ: UPST)
Value: $520,444,000
Percent of Dan Loeb’s 13F Portfolio: 4.01%
Number of Hedge Fund Holders: 15
Upstart is a new addition in billionaire Dan Loeb’s hedge fund, as Third Point bought 750,000 shares of the company, worth $496.16 million. Upstart is a lending marketplace that uses AI to gauge credit worthiness of customers and connect them to banks. Upstart stock is up 52% over the last 12 months. The company went public in December 2020, raising $180 million through the offering after it sold 9 million shares.
4. IAA, Inc. (NYSE: IAA)
Value: $643,302,000
Percent of Dan Loeb’s 13F Portfolio: 4.95%
Number of Hedge Fund Holders: 35
Illinois-based IAA, Inc. provides auction solutions for low-value vehicles. The company’s platforms and technologies connect sellers of damaged or used vehicles with their potential buyers. In the fourth quarter, the company posted adjusted EPS of $0.48, beating the Street’s estimates by $0.04. Revenue in the quarter jumped 7.8% to $383.5 million, beating the consensus by $15.93 million.
With a $643.3 million stake in IAA Inc., Third Point owns 9.9 million shares of the company as of the end of the fourth quarter of 2020. Our database shows that 35 hedge funds held stakes in IAA as of the end of the fourth quarter, versus 36 funds in the third quarter.
3. Danaher Corporation (NYSE: DHR)
Value: $666,420,000
Percent of Dan Loeb’s 13F Portfolio: 5.13%
Number of Hedge Fund Holders: 81
Danaher is one of the biggest industrial conglomerates in the world. The company has three main segments: Life Sciences, Diagnostics and Environmental & Applied Solutions. Danaher stock is up 70% over the last 12 months.
According to our database, the number of DHR’s long hedge funds positions increased at the end of the fourth quarter of 2020. There were 81 hedge funds that hold a position in Danaher Corp. compared to 75 funds in the third quarter. The biggest stakeholder of the company is Fisher Asset Management, with 3.09 million shares, worth $686.8 million.
In their Q3 2020 investor letter, Del Principe O’Brien Financial Advisors highlighted a few stocks and Danaher Corp (NYSE:DHR) is one of them. Here is what Del Principe O’Brien Financial Advisors said:
“Danaher, which designs, manufactures, and markets life science, diagnostics, dental, environmental, and applied solutions, is a prime example of how to use the business strategy of “bolt-on” acquisitions. Led by capital allocation experts the Rales brothers, Danaher will purchase a company in a fragmented industry, create a strategic platform for providing a unique service, and then spin off the company when it can create even more value as an independent entity.
Since Danaher’s bolt-on acquisition of the biopharma business of General Electric’s Life Sciences division for $21.4 billion in March 2019, we have realized a gain of well over 100%. The move boosted Danaher’s stock from around $90 (our purchase price) to the $210s. A gain like this is one of the big upsides of investing in a serial acquirer.”
2. The Walt Disney Company (NYSE: DIS)
Value: $869,664,000
Percent of Dan Loeb’s 13F Portfolio: 6.7%
Number of Hedge Fund Holders: 144
Disney ranks 2nd on the list of billionaire Dan Loeb’s top 10 stock picks. KeyBanc recently reiterated its Overweight rating for the entertainment company, citing strengths in its streaming business. Disney Plus recently crossed 100 million subscriber count. KeyBanc also hopes that the latest easing of restrictions in California could allow the company to open Disneyland in April. The firm has a $225 price target.
Semper Augustus Investments Group, in their Q4 2020 investor letter, said that they’ve initiated positions in The Walt Disney Company (NYSE: DIS) at high single-digit expected earnings yields.
Here is what Semper Augustus Investments Group has to say about The Walt Disney Company in their Q4 2020 investor letter:
“With few exceptions, portfolio activity added tremendous earning power. Sales were generally undertaken at high prices where price gains had outstripped fundamentals and thus as earnings yields diminished. Buys added wholesale earnings power. When numerous holdings plunged in price in March and later, we both added to and initiated positions at high single-digit expected earnings yields.
Portfolio activity in Disney provides an example of the opportunity the year brought. Disney was originally purchased in 2018 prior to the closing of their merger with Twenty-First Century Fox (21st Century Fox). Disney’s shares were weak during the prior four years, largely due to the well-known fact that cord cutting was harming Disney’s valuable ESPN franchise. Hard to believe in my household but some people evidently don’t enjoy watching televised sports, and as the highest priced platform in the traditional cable or satellite bundle, a loss of subscribers comes with a loss of revenue. Further, the merger-arbitrage community had bid up the price of Fox and down the price of Disney shares. At $100 per share, Disney traded for roughly 15 times its then earning power.
Disney’s decision to pull content from Netflix shined the light on the investment case at Semper. Netflix was initially viewed by Disney as just another pipe for distribution of TV and film content to its audience. Pulling content back in house and then distributing directly to customers via a new Disney+ app as well as Hulu, ESPN+ and a number of global platforms coming with the Fox deal turned us on to the enormous value of the franchise. Growth would come with much higher margins. My mistake at the time was not buying enough Disney. The merger consummated in March 2019 and we watched our little 1% position race ahead by half by the end of that year. I’ve done this many times, buying an outstanding company at an attractive price with too little money and watching my small position approach fair value. The mistake when made is not enough of an initial burn to qualify as a “touching of the hot stove” lesson, but I’d like to think I’ve done it enough to know better. Some rationale can be attributed to an appreciation of opportunity cost not being an exact science. In fairness there were other attractive venues for capital when buying Disney, but only 1% in a position of that business at that price was inexcusable.
A lesson for all investors when making an initial acquisition is to look in the mirror and ask, “Am I buying enough if for some reason I don’t get to add to it?”Redemption came with the pandemic, an unusual phrase in these tough times. In the case of Disney, the mouse was taken behind the woodshed and more than roughed up. Closed entirely were the theme parks, the cruise line, the broadcast and movie studios. Live sports were cancelled or moved to later dates. The company acted rationally, even brilliantly by suspending the semi-annual dividend, increasing its liquidity position by drawing on lines of credit and adding term debt to an already encumbered balance sheet (thanks to having only recently financed the Fox deal). In the case of Semper, a determination that the plague would be finite and stress testing the balance sheet and degree of cash flow impairment allowed for survival. Survival? Would you have imagined?
Confident that Disney would survive the pandemic with the balance sheet intact, the original sin of underspending led to salvation by adding materially to the position following the plummeting of the stock. By March, Disney’s shares traded back to $100 and even below our original purchase price. At our “new” purchase price, Disney fetched an expected 10% post-pandemic earnings yield and was valued at less than 2/3 of fair value. Of course, the calculation of earnings yield required an estimate of earning power in a more normal environment because Disney was surely going to lose money in 2020. Valuations using temporarily depressed earnings produce what appears a high price. At two-thirds of value, expected return becomes the earnings yield plus a 50% gain to fair value, plus any additional organic growth between here and there. When the world caught on to the success Disney was having attracting customers to its new app, even though much of Disney’s operations still run below capacity (Disneyland in California remains closed due to government dictate for example), investors looked beyond the immediate horizon and bid up the shares. By yearend, Disney rose to $181.18, somewhat north of our appraisal, allowing us to trim a now large, more fully valued position. Opportunity knocks.
Portfolio activity in Disney illustrates the folly of several beliefs. Under the efficient market hypothesis, whereby the market is all knowing, and no amount of research can add independent value, one might ask whether during a twelve-month period of time an established, mature company like Disney should see its shares fall by 45% and then rise by 129%. Even in a crisis like the one we all dealt with during 2020, is there room for rational analysis determining that Disney was Disney at the end of 2019, and at some point, post pandemic, will again be Disney, and oh by the way, with better content distribution than before and a cascade of pent-up demand?”
1. PG&E Corporation (NYSE: PCG)
Value: $1,058,293,000
Percent of Dan Loeb’s 13F Portfolio: 8.15%
Number of Hedge Fund Holders: 66
The Pacific Gas and Electric Company, or PG&E Corp, tops the list of Dan Loeb’s stock holdings. The stock is up 31% over the last 12 months. Wells Fargo recently upgraded PG&E to Equal Weight with a $12 target. The company recently posted 2020 adjusted EPS of $1.61, above the Street’s estimates by $0.01. Revenue in the quarter jumped 7.8% to $18.47 billion, missing the consensus by $130 million.
As of the end of the fourth quarter, 66 hedge funds in Insider Monkey’s database of 887 funds held stakes in PG&E, compared to 76 funds in the third quarter. Dan Loeb’s Third Point is the biggest stakeholder in the company, with 84.9 million shares, worth $1.06 billion.
In their Q2 2020 investor letter, Baupost Group mentioned PG&E Corp (NYSE:PCG):
“Fortunately, our investment in the subrogation claims and equity of Pacific Gas and Electric, the firm’s largest position, was not impacted by the COVID-19 fallout. As we expected, PG&E’s bankruptcy plan was confirmed by the judge overseeing the case, and the company emerged from bankruptcy on July 1st . Importantly, upon emergence, cash was placed in a trust for the benefit of the subrogation creditors. A substantial initial distribution from this trust, estimated to be roughly 80% of anticipated recoveries, is expected to be paid later this month.”
You can also take a peek at Cathie Wood’s Top 10 Stock Picks and John Rogers’ Top 10 Stock Picks.
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This article is originally published at Insider Monkey.
