Billionaire Activist Dan Loeb Loses Money in Q3 but Remains Bullish on Stock Picks

When it comes to activist investing, Dan Loeb is one of the best in the business, generating strong returns through pushing companies to implement changes that maximize shareholder value. However, Third Point was not spared in the third quarter as the broader market was heavily dented due to concerns over a slowdown of the Chinese economy and uncertainty regarding an interest rate hike. Loeb’s firm saw its Offshore Fund lose nearly 9% during the quarter and underperform the S&P 500 by 2.5 percentage points. Year-to-date the situation is a bit better, but the fund is still 4.5% in the red, compared to the benchmark’s 5.3% drop. However, the fund’s lifetime performance is still strong, with annualized gains of 16.2% since inception.

In his letter to investors for the third quarter, Loeb said that he is still bullish on the companies whose shares Third Point holds. The investor says that there are no indicators of an approaching recession in the U.S and that there still are some interesting opportunities for investing in stocks. Moreover, Third Point is also shorting many stocks, as Loeb said the fund has more short positions than long holdings.

“We have reduced our net exposure by nearly a third through sales and new shorts over the past few months while maintaining significant positions in our highest conviction, event-rich names. The conviction to keep and add to our core healthcare names during the selloff enabled us to re-establish ourselves on positive footing this month,” the letter added.

We follow Third Point alongside over 730 other funds as part of our small-cap strategy, which involves imitating the 15 most popular small-caps among these funds and which has returned 102% since August 2012, outperforming the S&P 500 by over 53 percentage points (see more details here). Our research also allows us to determine the overall hedge fund sentiment towards several thousand stocks and see if the smart money sees long-term potential in these companies.

In this article we are going to take a closer look at some of Loeb’s top picks and their performance. One of the companies that was highlighted in his letter is Baxter International Inc (NYSE:BAX), in which Third Point disclosed a 9.9% stake containing 53.85 million shares at the end of September. In August, the investor obtained two board seats and participated in the appointment of the company’s new CEO, Jose Almeida. Loeb believes that Almeida will be able to reanimate Baxter after the spin-off of Baxalta Inc (NYSE:BXLT), and lead the company “toward industry-leading operational performance.”

Third Point first disclosed a new stake in Baxter International Inc (NYSE:BAX) in its 13F filing for the second quarter, reporting ownership of 4.85 million shares. Meanwhile, during the second quarter, the company lost some popularity among the funds from our database, as 39 reported long stakes in Baxter as of the end of June, versus 50 funds as of the end of March. In aggregate, those funds held 5.60% of the company’s outstanding stock on June 30. The stock lost 13% during the third quarter and it trades at a forward multiple of around 26.60, which is a bit high, but also shows that investors anticipate significant growth in the near future. In the current round of 13F filings, Mario Gabelli’s Gabelli Funds and GAMCO Investors disclosed holding 394,066 shares and 157,850 shares of Baxter International Inc (NYSE:BAX) as of the end of September, respectively.

On the next page, we are going to look at how some top stock picks of Third Point performed in the previous quarter. Particularly, we will focus on Amgen, Inc. (NASDAQ:AMGN), Dow Chemical Co (NYSE:DOW), Allergan PLC (NYSE:AGN), and eBay Inc (NASDAQ:EBAY).

In the second quarter, Third Point reduced its stake in Amgen, Inc. (NASDAQ:AMGN) by 1.0 million shares and held 9.0 million shares at the end of June. The holding was its largest in terms of value and put a lot of pressure on the fund’s performance as Amgen, Inc. (NASDAQ:AMGN)’s shares dropped by 9% in the third quarter. However, the stock gained 13% in the last month as Amgen reported better-than-expected results for the third quarter and increased its guidance for the full year. Under Loeb’s pressure, the biotech company has cut costs and raised its dividend, while last year, the investor tried to pursue Amgen, Inc. (NASDAQ:AMGN) to split into two separate companies, saying that this move could boost the stock price by over 80% (read more details). Overall, 68 funds from our database held stakes equal to 3.60% of the company’s float at the end of June.

Dow Chemical Co (NYSE:DOW) was Third Point’s second-largest position, containing 23 million shares. Between July and September, the stock plunged by over 16% amid a broader market sell-off, but it is still over 13% in the green year-to-date. Billionaire Leon Cooperman’s Omega Advisors also mentioned Dow Chemical Co (NYSE:DOW) as one of its largest holdings in a recent conference call and projected a 12% growth rate for the company over the next three-to-five years.

Allergan PLC (NYSE:AGN) is one of Loeb’s long-term bets, the investor holding shares since the company was named Actavis. Allergan’s shares lost 10% in the third quarter, but many large investors maintain their bullish thesis on the stock. More specifically, Omega Advisors projects a 15% growth rate for the next three-to-five years, while Larry Robbins of Glenview Capital said that the company could be one of the winners amid the current issues with drug pricing, which would allow Allergan PLC (NYSE:AGN) to increase its portfolio at lower costs. Recently, Pfizer Inc. (NYSE:PFE) has disclosed interest in buying Allergan PLC (NYSE:AGN), sparking a lot of talk and speculation, as well as concerns regarding the current tax policies that are driving companies out of the U.S.

In eBay Inc (NASDAQ:EBAY), Third Point held over 19 million shares at the end of June, while the stock inched down by 4% in the third quarter. Loeb was one of the activists that pushed eBay Inc (NASDAQ:EBAY) to spin-off Paypal Holdings Inc (NASDAQ:PYPL) (Carl Icahn was another one). The stock gained even more popularity as the completion of the PayPal spinoff approached, with the number of funds bullish on eBay having appreciated by nine to 99 during the second quarter. In aggregate, these funds held 16% of eBay Inc (NASDAQ:EBAY)’s outstanding stock at the end of June.

Disclosure: None