Dan Loeb‘s Third Point has just issued its Investor Letter for the first quarter. The fund outlined its performance for the first three months of 2014, which stands at 3.3%, outperforming the benchmark S&P 500 Index by around 2.0 percentage points. Moreover, Third Point’s annualized returns since inception amount to 17.2%, versus the S&P 500’s gain of 7.6%. The letter also highlighted that Third Point is focusing on US and Japan sovereign and structured debt, but also that it has invested in more short positions since the beginning of the year than throughout the entirety of 2014. In addition, the investor made its bullish case for foreign investing as “accommodative monetary policy in Europe, Japan, and China has encouraged investors to adopt QE pattern recognition and plow capital into markets where central banks have opened pocketbooks.”
Third Point also pointed out two new positions initiated during the first three months of the year. It has not revealed the size of the stakes, but as the current round of 13F filings is almost completed, the investor will disclose its equity portfolio in the near future, which will also allow us to assess the size of its holdings in Yum! Brands, Inc. (NYSE:YUM) and Devon Energy Corp (NYSE:DVN), which represent Third Point’s additions to that equity portfolio. Meanwhile, here is what Mr. Loeb had to say about Yum! Brands:
“We initiated our position in the first quarter based on our view that the company was in the early stages of turning the page on recent troubles in its Chinese business. We believe this development should neutralize the largest overhang on the stock, set the stage for a dramatic profit recovery over the next 12-24 months, and change the public market narrative around long-term shareholder value-creation for the company.”
Yum! Brands, Inc. (NYSE:YUM)’s stock is up by 18% since the beginning of the year, outperforming its closest peer, McDonald’s Corporation (NYSE:MCD) by a hefty 15 percentage points. Both companies faced some issues in China, which affected their sales in the region. However, Mr. Loeb considers that Yum! Brands has the potential to recover as its KFC brand is still popular among consumers in China.
“We have spent substantial time assessing Yum!’s recovery potential and examining whether its status as a “repeat offender” has irreparably damaged the brand in China. Our 3 research suggests that the KFC brand (75% of units in China) continues to resonate strongly with local consumers across a variety of important dimensions, including food quality, value, convenience, and customer experience. By an overwhelming majority, local consumers believe the food at KFC is safe or at least as safe as other restaurant options. Perhaps most importantly, local customers continue to visit KFC, albeit less frequently, suggesting the company can increase traffic with better execution. As a rule of thumb in the restaurant industry, it is easier to generate more business from existing customers than it is to capture new ones or win back those who have left the brand.”
