In this article, we discuss billionaire Dan Loeb’s top 5 stock picks. For Loeb’s investment philosophy and his comments on certain stocks please see Billionaire Dan Loeb’s Top 10 Stock Picks.
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.
The company is also getting the attention of the smart money, as 144 hedge funds tracked by Insider Monkey reported owning stakes in the company at the end of the fourth quarter, up from 112 funds a quarter earlier. Disney ranks 11th in our list of the 30 Most Popular Stocks Among Hedge Funds: 2020 Q4 Rankings.
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.
