As Daniel Loeb (Trades, Portfolio), head of Third Point hedge fund, announced this week that his Offshore Fund beat the S&P 500 index year to date, he also disclosed – before his official portfolio has come out – that he purchased two new stocks in the second quarter, Alibaba (BABA, Financial) and BlackRock (BLK, Financial).
For the year through June, Loeb’s return has etched a 10.7% return as the index gained 9.3%. This year, the fund revived after a downbeat 2016 in which the S&P 500 overshadowed its 6.1% gain with a 12.0% rise. Loeb’s Third Point blazed into the investing scene in 1995 and has delivered a 15.87% annualized return in the years since, compared to the S&P 500’s annualized gain of 7.5%, using an event-driven, value-investing style.
This year’s market beat came as Loeb erroneously prepared for reflation, a tighter Fed and business-conducive policies from President Trump. “So far, none of these predictions has come to pass,” Loeb said in his second quarter letter, but remaining fully invested due to his expectation that global growth “was more important than the fading ‘Trump trade’” helped saved him.
Heading into the third quarter, Loeb said, “Despite the market run-up, we continue to find compelling investment opportunities, particularly with global growth intact.”
Loeb’s first new pick is Alibaba. A longtime fan of the company, he just sold his previous 2.6 million-share position in it in the fourth quarter 2016. He also held Alibaba through former Yahoo! Inc.’s stake after instigating a turnaround campaign at Yahoo in 2012 and selling his shares one year later with a nearly $1 billion profit.
Loeb got access to Alibaba through an investment in Japan’s Softbank as well. In late 2013, he invested $1 billion in the company, Alibaba’s largest stakeholder with 37% of shares at the time. Back then, Loeb quoted valuations of Alibaba by analysts at $171 billion, from $86 billion in July 2013. After several sales of Alibaba stock, SoftBank retains a 28% stake in it.
Like Facebook (FB, Financial), Alibaba has achieved significant growth through reforms in its advertising offerings, which make up the majority of its revenue. Much of his investment thesis rests on the monetization that lies ahead from these changes.
“If we compare market places globally, Alibaba’s current revenue yield is much lower than peers, at less than 4% versus 6-15% for all other large platforms (e.g. Amazon marketplace, JD marketplace, EBay, Rakuten, and MercadoLibre),” Loeb said.
“While this comparison ignores some important differences across platforms, it nonetheless illustrates that Alibaba’s current monetization is low in absolute terms with potential for future upside. Alibaba’s revenue yield has already begun expanding over the past two years (from ~2.5% in calendar 2015 to ~3.5% in calendar 2017) and we believe this trend will continue.”
His second selection was BlackRock (BLK, Financial), the world’s biggest asset manager, touting $5.7 trillion in assets. Along with $7% annualized net inflows Loeb mentioned, the behemoth has drawn 10-year revenue growth of 9.7%, with 14.1 EBITDA, 16% operating income, and 10.1% free cash flow growth annualized. Book value also expanded 6.9% annually for the same period.
The BlackRock investment also gives Loeb a piece of the growing ETF market.
“We think this acceleration in ETFs is just getting started, as regulatory change globally combined pushes lower-cost, transparent investment products, and institutional investors use ETFs as investment solutions, particularly in fixed income – an area where BlackRock has an even higher global market share for ETF products (~50%),” he said.
In 2016, ETF assets jumped 20%, and at an average of 19% year over year for the past 10 years, Morningstar reported. Record inflows of $284 billion in 2016 included a doubling of the amount going to U.S. funds from 2015. The tidal wave may also have some link to Warren Buffett (Trades, Portfolio), who has said that indexes are better buys than active management.
For retirement, Buffett said on a March CNBC interview, "Consistently buy an S&P 500 low-cost index fund," Warren Buffett told CNBC's On The Money in an interview recently. "I think it's the thing that makes the most sense practically all of the time.
“We see iShares delivering mid-teens topline growth over the next 3 years and producing over half of BlackRock’s earnings by 2019,” Loeb said. “More importantly, this is a business with significant operating leverage as it scales, with far less variable costs from compensation and benefits, which limit the margins of traditional asset managers.”
See Dan Loeb’s long portfolio here.
