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.
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.
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