Dan Loeb's Investment Thesis on Apple & Portuguese Sovereign Bonds: Q1 Letter ~ market folly

Monday, May 7, 2012

Dan Loeb's Investment Thesis on Apple & Portuguese Sovereign Bonds: Q1 Letter

Dan Loeb's hedge fund Third Point is out with its Q1 letter to investors.  In it, they reveal their investment thesis on Apple, Portuguese Sovereign Bonds, Express Scripts, and more.

Loeb's Thesis on Apple

A few months ago, we flagged when Third Point bought Apple (AAPL) and now we see the rationale for why they did so: capital return. While AAPL announced its dividend and buyback ahead of Third Point's expected timetable, they also like the company for two other reasons.

They bought shares at $445.  On valuation, they write: "Currently, Apple is trading at 13.4x CY2012 EPS of $45, and 11.6x CY2013 EPS of $52 ... Adjusting for cash, Apple's valuation drops to 11.1x CY2012 EPS and 9.6x C2013, leaving it inexpensive relative to the S&P 500."

Loeb's hedge fund also points to growth in China and the "halo 2.0" effect as key drivers of future success:  "In order to sustain its success, Apple will need to drive its ecosystem experience outside of the US, with multiple devices, content libraries and cloud services.  China's enthusiasm for Apple's products and brand is exciting, but investors will need to see whether Apple can establish the ecosystem the way it has in the U.S."

Third Point's Rationale on Portuguese Sovereign Bonds

We previously highlighted Third Point's new position in Portuguese sovereign bonds a month ago and now the hedge fund provides some color on their position.  They classify it as a classic "forced selling" situation which they like to take advantage of.

They write, "While we have studied Portugal since last year, it was not until the country's February downgrade to junk by all three rating agencies that we found a truly asymmetric investment opportunity.  Many investors liquidated their holdings after the downgrade, causing bonds to decline from the high 50s to the low 40s.  Following the playbook that has generated numerous successful investments for Third Point we provided liquidity to sellers when others would not."

On Express Scripts (ESRX) Post Medco Merger

Third Point played the risk arbitrage in the merger between Express Scripts (ESRX) and Medco Health.  Post merger, they find the combined entity attractive, writing: "Based on our analysis of the combined MHS/ESRX entity, we believe that Express Scripts remains an attractive investment candidate, combining 15+% EPS growth, the opportunity for accelerated synergy realization, and a reasonable forward PE multiple (13 x 2013 EPS)."

On Their Mortgage Portfolio

The hedge fund writes, "Third Point's mortgage portfolio has remained fairly consistent for the past 6-12 months.  We continue to own Alt-A Re-Remic mezzanine bonds, "seasoned" subprime bonds, and CMBS mezzanine bonds.  We have recently repurchased some Alt-A floating rate bonds which we previously owned in 2009."

Embedded below is Third Point's Q1 letter to investors:

For more on this fund, we just recently posted up Third Point's latest exposures as well as Loeb's comments at a distressed investing panel.

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