Dan Loeb Buys Herbalife, Morgan Stanley & Tesoro: Third Point Q4 Letter ~ market folly

Wednesday, January 9, 2013

Dan Loeb Buys Herbalife, Morgan Stanley & Tesoro: Third Point Q4 Letter

Let the battle begin.  Dan Loeb's hedge fund Third Point has started a long position in Herbalife (HLF), he revealed in his Q4 letter to investors.  He also filed a 13G with the SEC disclosing that Third Point owns 8.24% of the company as of January 3rd.

Loeb Long Herbalife

Readers will recall that we recently posted up Bill Ackman's short presentation on HLF where he called it a pyramid scheme.  Brian Sullivan tweeted that Andrew Ross Sorkin spoke with Third Point, who believe there's no evidence HLF is a pyramid scheme in their research.

Third Point believes in the compounder thesis that the stock was trading at an attractive discount (after Ackman's short presentation).  Third Point writes,

"Applying a modest 10-12x earnings multiple suggests Herbalife's shares are worth $55-68, offering 40-70% upside from here and making the company a compelling long investment ... Given that the company has historically traded more in the 12-14x range (and traded at 16-20x earnings through much of 2011 and early 2012), the opportunity for the company to tell its side of the story tomorrow at its Analyst Day in New York, and the significant short interest, we believe shares could even trade well about our current price target."

So, you now have two hedge fund heavyweights: 1 long, 1 short.  Who wins?  Only time will tell.  Now all we need is David Einhorn to toss his hat in the ring as well.  After all, in May of this year Einhorn popped up on a HLF earnings call and started asking questions.  However, he has not disclosed a position long or short.

Third Point Starts Morgan Stanley & Tesoro Positions

While the HLF position will get all the focus, we also wanted to highlight that Third Point disclosed a new position in Morgan Stanley in their Q4 letter as well. They feel the company is a turnaround story and point to the stock trading at a 20% discount to tangible book, down from the 35% discount when they acquired shares at an average price of $16.77 per share.

The hedge fund also bought shares of refiner Tesoro (TSO).  They write, "we see Tesoro generating about $9 per share in annual excess FCF on a normalized basis and our expectation is that shares can double from the current price of $40.  We believe the Q3 story was only the beginning, and are happy to own Tesoro for its next few chapters."

Embedded below is Dan Loeb & Third Point's Q4 2012 letter to investors:


For more on this hedge fund manager, we just yesterday posted up how Third Point ramped up net long equity exposure.

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