Billionaire Dan Loeb Grows Bearish on the Market As Short Positions Outpace His Conviction Buys

Billionaire investor Dan Loeb, the founder of activist hedge fund Third Point LLC, discussed the performance of his investment firm, including the broader market conditions and opportunities, in a conference call held by Third Point Reinsurance Ltd (NYSE:TPRE) earlier this month. Third Point Reinsurance’s investment portfolio, which is managed by Third Point LLC and accounts for 13% of its assets under management, posted a net-of-fees negative return of 8.7% in the third quarter. The billionaire hedge fund manager blamed the disappointing performance on “concerns about the slowdown in China, hedge fund deleveraging, U.S. presidential election and weaker U.S. economic data”. However, the Third Point Equity portfolio performed even worse than Third Point Reinsurance’s portfolio during the latest quarter, so let’s proceed with a discussion of what caused its poor third quarter performance, how Dan Loeb and his team reacted to the increased volatility, and the long-term bets of the billionaire investor.

Professional investors like Dan Loeb spend considerable time and money conducting due diligence on each company they invest in, which makes them the perfect investors to emulate. However, we also know that the returns of hedge funds on the whole have not been good for several years, underperforming the market. We analyzed the historical stock picks of these investors and our research revealed that the small-cap picks of these funds performed far better than their large-cap picks, which is where most of their money is invested and why their performances as a whole have been poor. Why pay fees to invest in both the best and worst ideas of a particular hedge fund when you can simply mimic the best ideas of the best fund managers on your own? A portfolio consisting of the 15 most popular small-cap stock picks among the funds we track has returned 102% and beaten the market by more than 53 percentage points since the end of August 2012 (see the details).

Getting back to our discussion, the Third Point Equity portfolio lost 14.1% on average exposure in the third quarter, primarily due to “several concentrated positions in the healthcare sector”. Dan Loeb asserted that his Third Point LLC had reduced its net equity exposure even before the August sell-off, and was in the process of decreasing its exposure even further. Most importantly, the billionaire hedge fund investor claimed that “we remain bullish on our high conviction ideas”, so on the next page of the article we will lay out his top four stock picks as of the end of the end of the third quarter.

At the same time, Dan Loeb’s Third Point LLC has built short positions that started to bear fruit, according to the billionaire. “Single name shorts have proved important to our strategy and we generated alpha from shorts in every sector during the quarter”, said Loeb during the recently-held conference call. In fact, the well-known hedge fund firm had more equity short positions than long ones, which clearly suggests that Third Point has a bearish view on the market at the moment. Although Dan Loeb and his colleagues did not disclose their short-selling candidates, John R. Berger, Chairman and Chief Executive Officer of Third Point Re, stated that “there are certain industries that we see that are deteriorating where we have made some bets”. Most importantly, the CEO said that “there has been some real sloppiness in accounting and this move towards using adjusted EBITDA and adjusted earnings has produced some companies that I think are trading on valuations that are not supported by the real numbers”. All in all, it’s a pity that the U.S. Securities and Exchange Commission does not require hedge funds to disclose their short positions.

Let’s now head to the next page of the article, where we discuss the four largest equity positions of Third Point LLC as of the end of the third quarter.

Considering that Dan Loeb recently stressed that he remained bullish on his “high conviction ideas”, it will be worthwhile to take a look at his top stock picks at the end of the September quarter. Third Point’s largest equity holding at the end of the third quarter was represented by Baxter International Inc. (NYSE:BAX).  The activist hedge fund upped its position in the healthcare company by a whopping 49 million shares during the latest quarter, ending the three-month period with 53.85 million shares. The freshly-updated position accounts for 16.69% of the fund’s portfolio as of September 30. At the end of September, Baxter International Inc. (NYSE:BAX) sealed an agreement with Loeb’s hedge fund, under which Third Point partner Munib Islam was added to the company’s Board of Directors. At the same time, the new addition to the Board will also represent the Board’s executive search committee, formed after CEO Robert Parkinson announced his departure. It is worth pointing our that the shares of Baxter have advanced by 14% since the beginning of the fourth quarter. Richard S. Pzena‘s Pzena Investment Management reported owning 4.86 million shares of Baxter International Inc. (NYSE:BAX) through the current round of 13F filings.

Amgen Inc. (NASDAQ:AMGN) is the second-largest equity holding of Third Point as of the end of the third quarter. The activist hedge fund firm increased its position in the biotechnology company by 850,000 shares during the recent quarter, owning 9.85 million shares valued at $1.36 billion as of September 30. The shares of the company have lost a mere 4% in 2015 despite being caught in both the broad August sell-off and the ‘biotech’ sell-off that occurred at the end of September. Healthcare-focused fund Sivik Global Healthcare, founded by Krishen Sud, reported owning 40,000 shares of Amgen Inc. (NASDAQ:AMGN) as of September 30.

Third Point owned 3.67 million shares in Allergan PLC (NYSE:AGN) at the end of the September quarter, which denoted a lift of 369,000 shares quarter-over-quarter. The shares of the pharmaceutical giant have gained almost 16% since the beginning of the year, thanks to their strong performance during the fourth quarter. Earlier this month, Allergan PLC (NYSE:AGN) reported its third quarter financial results, posting net revenue of $4.1 billion, which was an increase of 90% year-over-year. Meanwhile, its non-GAAP diluted earnings per share grew by 65% year-over-year to $3.48. First Eagle Investment Management reported owning 1.67 million Allergan PLC (NYSE:AGN) shares through its 13F filing for the September quarter.

Dow Chemical Co (NYSE:DOW) was the fourth-largest equity position of Dan Loeb’s firm at the end of the September quarter. His investment firm owns 23.5 million shares of the company as of September 30, which marks an increase of 500,000 shares quarter-over-quarter. The shares of Dow Chemical Co (NYSE:DOW) are up by 12% for the year, and are trading at a very attractive trailing P/E ratio of 13.97. This compares with a ratio of 22.70 for the S&P 500 Index. At the same time, the company pays out an annualized dividend of $1.68, which offers a current dividend yield of 3.29%. Phill Gross and Robert Atchinson‘s Adage Capital Management holds a 2.00 million-share position in Dow Chemical Co (NYSE:DOW) as of September 30.

Disclosure: None