Dan Loeb of Third Point is the new man in town taking the activist crown.
It’s funny because Ackman and Loeb are both billionaires, well-regarded activist investors and once friends, but are now labeled enemies.
I followed Ackman regularly starting from 2008. He is definitely a smart guy and the one that helped me get my first 1,000% return off GGP. I owe him big for that. But over the past couple of years, none of his picks have resonated with me.
Earlier in the year, I bought Herbalife (HLF) after reading what he said and wrote and again, I should thank him for that too.
Introducing Mr. LoebDan Loeb is the new investor to watch.
He moves deftly. He is a cold-blooded hound when it comes to investing. And that’s what we need to witness.
While Ackman goes all-in on one stock whether he is right or wrong, Loeb chooses his battles wisely.
What impressed me with Loeb is that he took a big position in Herbalife (HLF). Many viewed it as a way to get back at Ackman, but after the stock rose 50% from his purchase price, he promptly took his gains and moved on.
No chest beating at all.
So let’s take a look at three new stocks that fall into Mr. Loeb’s top 10.
Virgin Media Inc. (VMED)Provides entertainment and communications services in the UK through broadband Internet, televisionand phone services.
- Loeb Bought 11 million shares of Virgin Media in the first quarter.
- Its total weighting is 10.1% of his portfolio.
VMED has had a terrific run thanks to Liberty Global’s buyout. The deal is now approved and the company will be delisted.
This is a big win for Loeb. Although Third Point holds about 35 stocks, the top five are heavily concentrated.
- 27.5% in Yahoo
- 10.1% in VMED
- 9.9% in AIG
- 5.8% in IP
- 3.7% in NWSA
Accumulating 10.1% as a new position anticipating the closure of the merger is no easy task.
I said that for hedge funds, most companies fall into the illiquid category, simply because these funds have a lot of cash and buying volume. Unless they want to start moving the market, patience and discipline must be observed.
That’s why you also have to read the guide to buying illiquid stocks.
With the merger over, let’s take a look at the numbers to see whether Liberty got a good deal.
Not bad. I removed the PE since a company like VMED has too much leverage. It's best to use EV/EBITDA in this type of situation for pretax and pre depreciation.
Although taxes and depreciation is a real part of the business, when it comes to buyouts, the company is merging into an existing business so excess fat will be eliminated and tax savings can occur.
The Piotroski score shows improvement in the business since the recession.
But with all the different business segments, accruals look to be a mess.
It's best to check out whether there is anything to worry about.
Here’s a a quick pointer on interpreting the Sloan Ratio.
Sloan Ratio = (Net Income – CFO – CFI) / Total Assets
CFO = Cash From Operations
CFI = Cash From Investments
If the Sloan Ratio is between -10% and 10%, the company is in the safe zone and there is no funny business with accruals.Read about the Sloan Ratio and accruals if you want to know what these numbers mean in deeper detail.
If the Sloan Ratio is less than between -25% and -10% on the negative side, and between 10% and 25% on the positive side, this is a warning stage of accrual build up.
If the Sloan Ratio is less than -25% or greater than 25%, and this ratio is consistent over several quarters or even years, be careful. Earnings are highly likely to be made up of accruals.
Tiffany & Co. (TIF)Sells upscale jewelry.
- Loeb purchased 2.7 million shares of Tiffany.
- It's the sixth largest holding at 3.5% of his portfolio.
Women with money will spend for the brand name or husbands/boyfriends will pay the extra price for that extra surprise factor.
I sure did.
TTM numbers are struggling, but there is nothing bad to say about the company as a whole.
Jewelry isn’t the quickest selling product and you can see that from the inventory turnover numbers.
But how well does TIF stack up against competitors?
Higher growth, stronger margins, better returns.
The one part that trips me up is the valuation. For a company with such stable margins, the bottom line free cash flow is wildly inconsistent. FCF is all over the place, caused by increases in capital expenditures.
My estimate of intrinsic value is $60 on the low side to $80 on the high side.
B/E Aerospace Inc. (BEAV)Makes cabin interior products for commercial aircraft and business jets worldwide.
- Loeb loaded up on 2 million shares.
- It's his 10th largest holding.
- His average purchase price is $54.
For the line of business it’s in, I can’t justify the expected 20% to 25% growth that the market is expecting.
As a side note, for mostly all stock valuation methods that you use, you can do a “reverse” of it to find out the expectations.
A quick way to find the expected growth is to perform a reverse discounted cash flow or reverse Graham formula valuation.
It’s a great way to first value the company you normally would, and then to compare your numbers with what the market thinks.
Getting back to BEAV.
From an absolute valuation standpoint and using optimistic assumptions, I can see the intrinsic value ranging between the mid-$40s to $50s.
Plus, most of the growth is coming through acquisitions.
If acquisitions are smart, then taking on debt isn’t such a bad thing, but the company also has a habit of diluting the shares.
Although the dilution speed has slowed, it’s not as good as seeing a reduction.
|Year||Diluted Shares Outstanding (M)|
I know I’m only looking at a few things here, but when looking at their financial statements, I don’t see any compelling value arguments to get me excited.
So Loeb added three stocks to his portfolio: big new bets as all three are in the top 10 of his portfolio.
The difference could be his buy price and the current market price. If he bought at cheap enough prices, then it looks like a good deal, but at the moment, with so many other stocks out there, a quick look through VMED, TIF and BEAV doesn’t get me excited about any at the moment.
Download a summarized pdf tearsheet of all three stocks.