Returns at value-influenced Daniel Loeb (Trades, Portfolio)’s Third Point Offshore Fund exceeded the broader market for the first five months of the year, helped by a sizable advance in his most concentrated long position, Baxter International (BAX, Financial).
In a challenging year for investors seeking value, Loeb’s “value-oriented, event-driven” strategy earned him a 9.9% return through the month of May, versus an 8.7% gain in the S&P 500. The average hedge fund returned 3.31% year to date and event driven hedge funds returned 4.76%, according to HFRX Indices.
Medical device company Baxter International, Loeb’s biggest position representing 23.28% of his portfolio, more than double his second-biggest position, gained 34.69% year to date, making it his third best-performing stock behind Nomad Foods (NOMD, Financial) and Sothebys (BID, Financial). Loeb said in his second-quarter 2016 letter that “its current size is consistent with our conviction about the company and its leadership and the potential we see for meaningful upside from these levels.”
Loeb started the position with 3.95 million shares in the second quarter 2015 when the share price averaged around $37 and added 49.9 million shares the following quarter when when it averaged around $38 per share. He held 46 million shares of the company after trimming it by 11.37% in the first quarter. At close of trading Friday, the stock was priced at $59.72, giving him an estimated gain of 53%.
Loeb has said in his first-quarter letter that he has positioned the fund in 2017 for “improving global growth” based on an improved GDP forecast for the year, an expected return to earnings growth and shifts to pro-business policy. The reasons he listed two years ago for buying Baxter relied mainly on its prospects for increasing shareholder value based on bottom-up factors and activist involvement by his firm, he said in another letter.
In January 2016, Baxter’s new CEO Joe Almeida announced a three-part plan to transform the company, aiming for portfolio optimization, enhanced operation excellence and disciplined capital allocation. Almeida that year also updated financial guidance for 2020 of 17-18% operating margins, 24-25% EBITDA margins, $1.75 billion in free cash flow and $2.75-$3.00 in earnings per share.
Baxter made headway toward the goals in 2016, reporting operating margins of 13.9% compared to 7.92% in the same quarter the previous year. Free cash flow for the full year 2016 was $935 million but higher than $860 million for 2015, with adjusted EPS of $1.96, increased from $1.76.
Currently Baxter’s price sits hear a 10-year high, and its price-book ratio at 3.74 and price-sales ratio at 3.22 both hover near their 10-year highs.
