We love Dan Loeb. With an annual alpha of more than 7%, he’s certainly made his mark in the hedge fund circles. And like hedge fund circles, there’s very little literature on his investment style. One of the few sources we found (that we trust) is Katherine Burton’s “Hedge Hunters.”
According to the book, Loeb buys companies with solid franchises that are trading at a discount and that generate a lot of free cash flow. These companies are misjudged by the market, and the situations are more common for entities emerging from bankruptcy.
According to “Hedge Hunters,” Loeb thinks those companies may have a more favorable operating model than in the past, and managers have a greater incentive to make the businesses succeed. He says management may or may not unconsciously understate the performance of the company. The initial goal of the fund was to “invest in special situations in distressed debt and equity, and that’s still how the firm invests today. Loeb seeks out shares to buy, or ones to sell short, which will produce a 30 to 50 percent annualized return.”
Burton says Third Point has a concentrated portfolio. The top ten, she says, account for nearly 50% of its long positions. “Loeb uses a modest amount of leverage, with the portfolio’s gross exposure at 100 to 200 percent of assets and net exposure between 30 percent and 70 percent.” With four partners, he runs industry groups. Teams also focus on geographic areas. “Another is dedicated to short selling. The partners have discretion to buy or sell short up to a certain position size, and if they think a bet is worthy of a bigger stake, they bring the idea to Loeb. If he agrees, the position can grow as large as 10 percent of assets.”
You can read more about Daniel Loeb’s investment style, his background and his scuffles with company executives and other hedge funds (i.e. Citadel’s Ken Griffin) in Katherine Burton’s “Hedge Hunters”.
Here are the 20 Largest Stocks in Third Point’s portfolio:
|POTASH CORP SASK INC||POT||144,040|
|HEALTH NET INC||HNT||76,132|
|CIT GROUP INC||CIT||63,271|
|MEAD JOHNSON NUTRITION CO||MJN||56,910|
|LIBERTY MEDIA CORP NEW||LCAPA||54,840|
|NXP SEMICONDUCTORS N V||NXPI||37,790|
|ASPEN TECHNOLOGY INC||AZPN||36,295|
|ORITANI FINL CORP DEL||ORIT||20,390|
|XERIUM TECHNOLOGIES INC||XRM||17,062|
|MADISON SQUARE GARDEN INC||MSG||16,872|
|SPDR GOLD TRUST||GLD||14,710|
|NORTHERN TR CORP||NTRS||14,472|
Insider Monkey, your source for free insider trading data, knows that the stocks recently added to a hedge fund manager’s portfolio are more likely to beat the index funds. We developed a proprietary ranking system that determines which among the newly acquired stocks will perform even better than the rest.
Here are our top five picks among Daniel Loeb’s purchases during the third quarter:
|POTASH CORP SASK INC||POT|
|NXP SEMICONDUCTORS N V||NXPI|
|ORITANI FINL CORP DEL||ORIT|
|KKR & CO L P DEL||KKR|
In addition to these, Third Point also bought Six Flags (SIX) which had recent insider purchases. Oneida Financial (ONFC), Northern Trust (NTRS), Eagle Rock Energy Partners (EROC), Gold ETF (GLD), and Apple (AAPL) were all among the recent purchases by Dan Loeb.