Dan Loeb’s hedge fund, Third Point, sent a letter to its investors on Monday.
Third Point identifies itself as a macro- and event-based fund, but is mostly known for its shareholder activism. It has had some notable wins in recent years, including doubling its investment in Yahoo! Inc. (NASDAQ:YHOO).
Third Point’s case for CF
CF Industries Holdings, Inc. (NYSE:CF) is a major North American producer of fertilizer. Third Point believes that the company is misunderstood and undervalued, and that management should be able to increase the firm’s dividend going forward.
Third Point appears to view CF Industries Holdings, Inc. (NYSE:CF) as a secondary play on the US energy boom. In just the last few years, fracking technology has transformed the US from a desperate fossil fuel importer to a major producer of oil and natural gas.
The US as a whole is the largest producer of natural gas, and Texas alone is now the world’s 15th largest producer of oil when measured against other countries. While oil prices have remained near $100 per barrel, the price of natural gas has been falling. Although it’s recovered since dropping below $2 in 2012, it still remains around $3.50 per MMBtu.
According to Third Point, this is terrific for CF Industries Holdings, Inc. (NYSE:CF). Natural gas is the primary input in the production of the company’s nitrogen fertilizer, and low natural gas prices in the US benefit CF Industries Holdings, Inc. (NYSE:CF) at the expense of its foreign rivals.
Meanwhile, these rivals halt their production of fertilizer when the price falls beneath a certain threshold, giving CF Industries Holdings, Inc. (NYSE:CF) a beneficial spread from which to extract cash flow.
The letter does not suggest that Third Point is taking an activist stake, but the fund does believe that the company should be able to increase its dividend, noting that “a dividend strategy based on CF’s stable cash flow stream would lead investors to reassess the company’s valuation.”
Turning up the heat on Sony
When agitating for corporate change, Loeb frequently turns to insults. In a 2005 letter to Star Gas’ management, he told CEO Irik Sevin to “do what [he does] best: retreat to [his] waterfront mansion.”
As Loeb has been pushing Sony Corporation (ADR) (NYSE:SNE) to do a partial spinoff of its entertainment division, he has remained particularly civil. That is, until this letter, when he begins to turn up the heat on Sony Corporation (ADR) (NYSE:SNE) management:
We find it perplexing that [Sony’s CEO] does not worry about a division that has just released 2013’s versions of Waterworld and Ishtar back-to-back, instead giving free passes to Sony Pictures Entertainment Co-CEO’s Michael Lynton and Amy Pascal, the executives responsible for these debacles.
Loeb believes that Sony Entertainment is a hidden asset — an American entertainment company hidden within a Japanese electronics giant. Loeb believes that by spinning off a portion of the company, and giving it an independent board, it would return more value to shareholders.
I had assumed that, based on the structure of the proposal, Third Point was looking for a way to buy Sony Entertainment at a discount while limiting its exposure to Sony Electronics. As a whole, Sony Corporation (ADR) (NYSE:SNE) has not been a great performer in recent years, as its electronics wing has been pressured by rivals like Samsung and Apple.
But in the recent letter, Third Point heaps praise on Sony Corporation (ADR) (NYSE:SNE), writing that “the visible improvement in Sony’s new products has caused us to rethink our approach to valuing Electronics.”
Specifically, Third Point sees a resurgent Sony Electronics division centered around the company’s lineup of Xperia phones and tablets, as well as its upcoming PlayStation 4, which is poised to steal market share from rivals Nintendo and Microsoft.
Yahoo! is in good hands
Although Third Point has now sold two-thirds of its Yahoo! Inc. (NASDAQ:YHOO) stake, the fund writes that the company will continue to “thrive” under new CEO Marissa Mayer.
Since Loeb first got involved, Yahoo! Inc. (NASDAQ:YHOO)’s board and top management has been gutted. Third Point notes that the board is now 90% composed of new members, and Yahoo! Inc. (NASDAQ:YHOO) has a new CEO and CFO.
Third Point writes that the company has “increased engagement” and seen a “surge of talent.” At the same time, momentum for new mobile products has increased.
Analysts at Needham downgraded Yahoo! Inc. (NASDAQ:YHOO) to a hold last week on Loeb’s exit. Given that Loeb is selling, he could see limited upside from here.
Still, Third Point has not exited its entire stake, and Alibaba has yet to go public. Meanwhile, the question of what will happen to Yahoo! Japan remains unanswered.
Since Third Point has doubled its investment, selling some of its position would seem like prudent portfolio management. At the same time, the fund is closed to outside investors, and its capital is limited.
Perhaps the fund is selling some of its Yahoo! shares to raise capital for a bigger Sony stake. If Third Point increases its stake, it may be more likely to sway Sony’s management.
Loeb’s track record
Investors should not attempt to blindly replicate the portfolio of any major investor, including Loeb. His fund is actually underperforming the S&P 500 this year, despite big wins in stocks like Yahoo! and Herbalife.
Nevertheless, given Loeb’s investing acumen, it makes sense to consider his ideas. In this case, that means CF Industries, Sony Corporation (ADR) (NYSE:SNE), and Yahoo!.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Yahoo!. The Motley Fool owns shares of CF Industries Holdings (NYSE:CF). Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Dan Loeb Makes the Case for Sony, CF, and Yahoo! originally appeared on Fool.com is written by Salvatore “Sam” Mattera.
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