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Two Stocks That Could Become Dan Loeb, Third Point’s Next Activist Targets

Dan Loeb’s Third Point had a decent 2017, as its flagship fund ended the year with a net return of +18.1% according to an investor letter. Although it was lower than the S&P500’s 21.8% gain, Loeb’s long term results puts him among the best hedge fund managers. Since its inception, Third Point has generated annual returns of 15.8%, almost double the market’s 8.2% gain.

In his latest letter to investors, Loeb has shared his main concerns for the market, stating that he and his team do not “fear recession now” but are monitoring some key metrics, including inflation and earnings growth trends. The letter also mentions that Third Point is well-positioned face the risk of recession, given the “event-driven” strategy employed. The fund’s latest 13F filing shows the management team has shuffled its holdings during the 2017 fourth quarter and we have looked for any potential activist targets going forward.

Third Point

Third Point’s recent 13F filing shows the fund acquired exactly 1 million shares of Pinnacle Foods Inc (NYSE:PF). In the meantime, Ken Griffin’s Citadel Investment Group increased its stake by 26% to a little over 2.6 million shares. Activist JANA Partners, run by Barry Rosenstein, has also been slowly increasing its stake in Pinnacle Foods, fueling rumors that an activist play might be in sight. Overall, Pinnacle Foods witnessed falling popularity among the hedge funds tracked by Insider Monkey. At the end of 2017, 37 funds were invested in the stock, down from 47 registered at the end of the third quarter.

In the past twelve months, Pinnacle Foods Inc (NYSE:PF) shares have been trading in a range, oscillating between $55 and $65 per unit. The stock ended Friday’s session at $56.13 per share, down 2% for the past twelve months. Pinnacle Foods’ stock performance does not differ too much from the general trend in the industry or from its main competitors. For example, General Mills, Inc. (NYSE:GIS) stock is currently down 12.9% for the past twelve months, while The Kraft Heinz Company (NASDAQ:KHC) stock fell 26% during the same period of time.

In recent years Pinnacle Foods Inc (NYSE:PF) has managed to fuel growth through acquisitions, having acquired Garden Protein International in 2014 and Boulder Brands in 2016, but has failed to maintain profitability. Operating margin fell from 19.77% in 2014 to 15.97% in 2016, while net margin dropped to 6.75% in 2016 from 9.59% in 2014.

According to a recent report by Reuters, Jefferies analysts believe either Third Point or JANA Partners could engage with Pinnacle Foods’ management and push for a sale of the company. “We view PF as one of the best-managed companies in our universe and as such don’t see Third Point pushing for a management shake-up. We could see them pushing for a sale given how ripe the frozen category is for consolidation and the fact that PF’s size limits its ability to be the acquirer of choice in the category,” read a report issued by Jefferies. They have identified Conagra Brands Inc (NYSE:CAG) as a natural buyer for Pinnacle Foods and estimate a bid of $80 per share, which would constitute a 42.5% premium.

Southwestern Energy Company (NYSE:SWN) is another fresh bet initiated by Dan Loeb and his team. During the fourth quarter, Third Point accumulated 15 million shares according to its latest regulatory filing. Cliff Asness and AQR Capital Management are also bullish on Southwestern, having reported a massive increase in their holding of the stock to 20.2 million shares. Insider Monkey data shows that hedge funds’ interest in Southwestern Energy Company picked up during the 2017 fourth quarter, with the number of funds holding the stock having jumped to 35 from 31 registered at the end of September.

In comparison to its competitors, Southwestern Energy Company (NYSE:SWN) stock performance has been rather poor. During the past twelve months, Southwestern shares have lost 54% of their value, while competitor Marathon Oil Corporation (NYSE:MRO) stock is down by just 1%. ConocoPhillips (NYSE:COP), one of the industry leader, is actually in green territory, having increased by 21% during the same period of time.

Ever since the crash of oil and natural gas prices in 2014, Southwestern Energy Company (NYSE:SWN) has been under pressure to realign its portfolio and adapt to life with lower energy prices. The company has cut down considerably on drilling and has divested some non-core assets. Southwestern Energy has also completed a secondary offering in 2016 and raised $1.25 billion in the process. It then used that cash to reduce its debt burden and resumed drilling in the second half of 2016.

Southwestern Energy’s financial reports from 2017 show a cumulative revenue of $2.39 billion for the first nine months, just shy of the $2.43 billion in revenue reported for the whole of 2016. So, it’s safe to assume that 2017 full-year revenue will surpass that of 2016 when the company issues the next financial report on March 1. Since Southwestern’s revenue depends a lot on natural gas prices, it is very important to pay close attention to performance measures as well. Should the company fail to register meaningful progress in that department, it could become an activist target for Third Point.

Disclosure: none.