Daniel Loeb ?s Third Point hedge fund, which has
$10.1 billion in assets under management, has achieved a 21.2%
year-to-date return, compared to 16% for the S&P 500. This is
after gaining 3.6% in December, outpacing the S&P?s 0.9%. The
outperformance was driven by his best-performing investments: Greek
government bonds, Yahoo! Inc. ( YHOO ) and American
International Group ( AIG ). Loeb describes
his firm as event-driven value investors.
Greek Government Bonds
Loeb picked up a position in Greek government bonds in the third
quarter as he earned a 35% return on average capital investing in
European credit in the second and third quarters of 2012. He
attributed his success in the troubled area to two tenants of his
investing rules.
First, he looks for credit situations where his expectations are
not extremely high, but not as low as the market either. He has
used this perspective to make money not only in Europe, but in his
subprime mortgage-backed security positions, Chesapeake ( CHK ) performing credit
trade, and others throughout his fund?s history.
Second, he seeks to deeply understand the situations he invests
in, even better than other market participants. In the case of
Europe, he and his team spent 12 to 18 months and significant
resources to grasp fully the mechanics of the sovereign debt
crisis, with the assistance of other academic, political and
economic advisors.
After all of the effort, he called Greece ?the most stubborn and
opaque piece of the European puzzle.? Yet he believed the market
was overreacting to the possibility of a Greek default.
Loeb describes the steps leading up to the decision to invest in
the country in his third quarter letter :
?In order to fully evaluate the potential remaining upside in
the GGB Strip, we sent our well-traveled European credit analyst to
Athens. Our meetings convinced us that Greek officials strongly
believe that the painful Troika program implementation is a far
superior option to leaving the Euro. On that trip we also
discovered several ?green shoots? emerging in the Greek fiscal
position which also appear to be widely ignored by the broader
market. Greece has demonstrated impressive spending controls, with
its 2012 budget largely on track despite a significant shortfall in
receipts due to worse than anticipated economic conditions. While
Greece is still grossly overleveraged at 170% debt to GDP and the
Strip price appears to anticipate another restructuring which will
subordinate private creditors, we believe another PSI is highly
unlikely given the Strip?s air tight documentation, governed by UK
law, which explicitly ranks it pari passu with the debt held by the
Troika. Even in the event there was a large scale restructuring
where both private and official creditors took haircuts of 15% to
25%, it is likely the Strip would still appreciate significantly
from 20 as exit yields of 10% to 12% would be reasonable given the
country?s reduced leverage as a result of any restructuring.
A clear commitment to keeping Greece inside the EU, combined with
resolute program compliance, some amount of Official Sector
Involvement (?OSI?) and a bottoming out in the Greek economy should
move the Strip from trading at assumed recovery levels to bonds
priced on a yield basis.?
Loeb must have disposed of a large amount of Greek government
bonds recently, as they appeared in his top positions listed in
November and are not among his top five in December.
Yahoo! Inc. ( YHOO )
Loeb has planted 23% of his portfolio into largest position Yahoo
since opening the position in the third quarter of 2011 when shares
traded for about $14 each on average. After moving sideways for
most of 2012, the stock began moving up in September, eventually
gaining 26% over the past year. It trades for $19.86 on Friday,
with a P/E of 6.03, P/B of 1.5 and P/S of 4.6.
YHOO data by GuruFocus.com
Loeb and Third Point representatives joined the Yahoo board in
May. Since then, Yahoo was able to reach an agreement for privately
held Chinese Internet company Alibaba to repurchase half of Yahoo?s
position in it, settle a patent lawsuit against Facebook ( FB ) and replace the CEO
after finding embellishments in his resume.
The search engine company has been led by former Google executive
Marissa Mayer since July 16, 2012. In its first quarterly financial
report under her leadership, it increased revenue 2% year over year
to $1.089 billion, excluding acquisition costs. GAAP revenue
declined 1% to $1.202 billion. GAAP net earnings declined to $298
million, from $3.16 billion a year previously.
Yahoo in the third quarter closed the first stage of selling its
stake in Alibaba back to the company. As a result, it received $7.6
billion in pre-tax proceeds, $6.3 billion in cash and $800 million
in preferred in shares and $550 million for a license agreement.
Yahoo will return $3.65 billion in after-tax proceeds, or 85% of
the net cash proceeds, to shareholders.
The company?s cash position in the third quarter improved to $9.4
billion from $2.5 billion at year-end 2011.
AIG ( AIG
)
Loeb has allocated 15.2% if his portfolio into second-largest
holding AIG. He started the position in the second quarter with
2.25 million shares for $31 each on average, then added 21.25
million shares for $33 each on average the next quarter.
In a sudden turn of events, AIG went from Loeb?s ?top loser? in
November, to his third ?top winner? in December. The massive
insurance corporation?s stock price has increased almost 52% over
the past year. It trades for $36.32 on Friday, near a one-year
high, with a P/E of 1.9, P/B of 0.6 and P/S of 0.8.
AIG data by
GuruFocus.com
Loeb had the opportunity to purchase shares of AIG, the world?s
largest insurance organization, in March at what he believes was a
discount to intrinsic value due to the U.S. Treasury?s ?forced? (or
?non-economically-motivated) selling of its stake in the company.
Second, he believed that AIG?s buybacks from the Treasury created
substantial capital return that offered downside protection. Third,
the government reducing its stake increased its index weighting,
which he believed would force index-sensitive investors to buy more
shares.
He then began to view the investment as a ?post-reorg equity newly
emerged, with all of the attendant upside,? and bought more shares
in the Treasury?s second and third quarter offerings.
He commented on his short- and long-term expectations for the
company in his third quarter letter:
In the near term, we believe AIG?s continued portfolio
optimization should free up additional excess capital that, subject
to regulatory approval, likely can be returned to shareholders. In
December, AIG?s lockup in its listed, non-core Asian life insurance
business, AIA, will expire, allowing the company to monetize its
unencumbered 13.7% interest worth some USD $6.1 billion at recent
market valuations. Further, we believe the sale, spin, or listing
of ILFC, AIG?s aircraft lessor subsidiary, will not only generate
$5+ billion in excess capital but also simplify the group?s
structure, reducing cost of capital.
Longer term, we believe the company?s operational turnaround will
help AIG realize its intrinsic value, as Chartis, AIG?s property
and casualty arm, improves its return on equity to the targeted 10
- 12% by 2015. To achieve this ROE target, Chartis?s management,
led by the talented Peter Hancock, is emphasizing international and
shorter tail consumer property lines, while investing in new policy
administration and back office systems. We believe this ROE target
is achievable, and view the early evidence as promising: a ~300 bps
year-over-year improvement in Chartis? Q2?12 ex-cat loss ratio to
65.2% and a ~100 bps year-over-year increase in consumer share of
premiums to 39% in Q2. We are further encouraged that Chartis?
turnaround has the wind at its back with the mid to high single
digit pricing growth in the property and casualty insurance
industry.
After owning 92% of the company about two years ago, the U.S.
government finished selling its remaining AIG shares about a week
ago.
For the third quarter, the company reported net income of $1.9
billion, compared to a net loss of $4 billion the same time in
2011. Revenue rose to $14.99 billion from $14.74 billion the same
time last year, and book value jumped to $62.83 per share from
$21.95 per share the same time last year.
See Daniel Loeb?s portfolio here, and check out his Undervalued
Stocks, Top Growth Companies and High Yield stocks. Also, don?t
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