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Billionaire Dan Loeb’s Top Small-Cap Picks: Sothebys (BID), Third Point Reinsurance Ltd (TPRE), and Intrexon Corp (XON)

Billionaire activist hedge fund manager Dan Loeb of Third Point LLC recently filed his 13F with the Securities and Exchange Commission (SEC) for the reporting period of March 31. The total public equity portfolio value of the fund came in at $10.8 billion, a slight decrease from the more than $11 billion it held at the end of 2014. Loeb started the fund with $3.3 million in assets under management (AUM) in 1995 and over the years has grown it into one of the largest and most successful activist hedge funds on the Street, with AUM crossing the $17.5 billion-mark in September, 2014. Although Third Point has made a reputation for itself by taking activist stakes in several well known large-cap companies, in this article we will focus on Third Point’s and Dan Loeb’s top small-cap picks: Sothebys (NYSE:BID), Third Point Reinsurance Ltd (NYSE:TPRE), and Intrexon Corp (NYSE:XON).

Third Point

In the last few years activist hedge funds have outperformed the broader hedge fund industry by a wide margin and Third Point has been leading that pack. When activists get involved in a company, most of the changes they push for are beneficial not only for their own investors, but also for all the shareholders of that company. However, instead of paying the 2/20 (2% of AUM annually and 20% of all profits made in a year) fees to hedge funds, average investors can emulate the same strategy in their portfolio at much lower costs by following the top holdings of such funds. Our research has shown that in the period between 1999 and 2012, the top 15 small-cap holdings of hedge funds outperformed the broader market by an average of nearly 1 percentage point each month, whereas the top holdings of hedge funds overall (mostly large-cap stocks) underperformed the market by 7 basis points monthly on average. In the 32 months since the launch of Insider Monkey’s small-cap strategy in August 2012, it has returned 144.4%, decimating the broader market by over 84 percentage points.

Third Point initiated its stake in Sothebys (NYSE:BID) in August 2013 and in October of the same year the fund announced that it was now the largest shareholder of the company. As of March 31, Sothebys (NYSE:BID) remained the top small-cap holding of Third Point, while the fund remains the company’s largest shareholder with 6.65 million shares valued at $281.03 million. In November 2014, after facing constant criticism from Dan Loeb, Sothebys (NYSE:BID) chairman and CEO William F. Ruprecht announced his resignation, causing the company’s stock to surge 7%. In its latest quarterly earnings report, Sothebys (NYSE:BID) declared an EPS of $0.07, compared to the EPS loss of $0.09 it reported for the same quarter last year. Apart from Third Point, Richard McGuire’s Marcato Capital Management is another major shareholder og the company.

Third Point mistakenly disclosed a stake in its property and casualty reinsurance subsidiary Third Point Reinsurance Ltd (NYSE:TPRE), a position of almost 9.18 million shares of the company during the first quarter. The hedge fund amended the 13F filing and removed the $129.9 million position from its list of holdings because Third Point didn’t invest in TPRE; Dan Loeb did as part of his personal portfolio. For the first quarter of 2015, Third Point Reinsurance Ltd (NYSE:TPRE) reported net income of $50.5 million, significantly above the $39.8 million that it reported for the first quarter of 2014. Most analysts on the Street have an ‘Overweight’ rating on the stock, with an average price target of $17.50. Additionally, the consensus estimate among analysts is that the company will declare an EPS of $2.20 for fiscal year 2015. Brian Ashford-Russell And Tim Woolley’s Polar Capital and Ken Griffin’s Citadel Investment Group are other hedge funds that have a substantial stake in Third Point Reinsurance Ltd (NYSE:TPRE).

Third Point liquidated 200,000 shares of Intrexon Corp (NYSE:XON) in the first quarter, reducing its stake to 2.70 million shares valued at $122.50 million, though Intrexon Corp (NYSE:XON) remains a top three small-cap pick of the fund and the position actually increased greatly in value despite the sale of shares. That’s due to Intrexon Corp (NYSE:XON)’s shares spiking by over 50% during the first quarter, thus Third Point selling some shares should be seen more as profit booking than anything else. For the first quarter of 2015, the biotech company reported an EPS of $0.25. However, analysts expect the company to report an EPS loss of $0.13 for the second quarter. Among the hedge funds we track, David Cohen and Harold Levy’s Iridian Asset Management is also bullish on Intrexon Corp (NYSE:XON). The fund increased its stake in the company by 18% to 1.81 million shares in the quarter ending March 31.

Disclosure: None

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