Dan Loeb's Third Point Still Sees Event-Driven Opportunity: Investor Letter

Thanks to DistressedDebtInvesting for posting this up as below is the latest investor letter from Dan Loeb's hedge fund Third Point. We've covered Loeb's fund in-depth for some time now and last week we posted up Third Point's recent performance and earlier we took a look at their equity portfolio as well.

In the letter, Loeb touched on some of their notable positions and mentioned that their CIT stake is one of their largest and they believe that the company will transition to a lending institution with a retail deposit base. By reducing its debt and extending maturities, CIT now has time on their side to make this segway. In terms of their mortgage backed securities (MBS) exposure, they mainly have invested in single name senior RMBS stakes. Turning to equities, their Health Net (HNT) stake was purchased when shares were hit due to the loss of the Tricare contract. Third point likes HNT due to quality management and expected increase in profitability. Their stake in Mead Johnson Nutrition (MJN) is described as their classic risk arbitrage play as they see it as a "best-in-class asset" that is solid as a standalone company but is a prime takeover target as well.

Turning to Third Point's investment outlook, Loeb is constructive despite the modest valuations we're currently seeing. Interestingly though, Loeb is worried about various risks that could "unravel quickly in a step function." To try and mitigate this, Third Point has put on various tail risk hedges. Lastly, it was interesting for Loeb to note that they have avoided certain 'consensus' hedgie trades such as long gold, commodity stocks, and emerging markets. While Third Point has taken their exposure down a bit since its peak in January, they still remain net long distressed debt and MBS as we noted in Third Point's recent performance.

Embedded below is Third Point's fourth quarter investor letter:



You can directly download a .pdf here.

For more of our coverage of this hedge fund, head to Dan Loeb's recommended reading list as well as our post on Third Point's portfolio.

Dan Loeb's Third Point Likes Citigroup & Transdigm Group: 13F Filing

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund 13F filings.)

Next up is Dan Loeb's Third Point LLC. Third Point manages a series of hedge funds and focus on event driven and value oriented investments. Loeb started his hedge fund with $3.3 million in 1995 and today manages billions. To learn how to invest like a prominent hedge fund manager, check out Dan Loeb's recommended reading list. Additionally, we recommend watching a video of Dan Loeb giving some general investing advice.

Since inception, they've seen greater than 15% annual returns. For 2009, Third Point's Offshore fund was up 38.6% and their Ultra fund up 44.2% as noted in our list of hedge fund performance numbers. The positions listed below were their long equity, note, and options holdings as of December 31st, 2009 as filed with the SEC. All holdings are common stock unless otherwise denoted.


Brand New Positions
Citigroup (C)
CIT Group (CIT) ~ most likely a result of debt to equity conversion
Affiliated Comp (ACS)
Mead Johnson Nutrition (MJN)
Xerox (XRX)
Energy Partners (EPL) ~ likely a result of senior notes converting into equity
DirecTV (DTV) ~ a result of the Liberty Media merger
Yahoo (YHOO)
Liberty Media (LSTZA) ~ also a result of the Liberty Media merger
Advanced Micro Devices (AMD)
Pain Therapeutics (PTIE)
Life Partners (LPHI)
TCW Strategic (TSI)


Increased Positions
Coinstar (CSTR): Increased by 183.3%
Transdigm (TDG): Increased by 80%
Wellpoint (WLP): Increased by 37.5%
Capitalsource (CSE): Increased by 14.6%


Reduced Positions
American Water Works (AWK): Reduced by 75%
Greenlight Capital Re (GLRE): Reduced by 54%
Hewlett Packard (HPQ): Reduced by 50%
Popular (BPOP): Reduced by 43.7%


Removed Positions (Sold out completely):
Wyeth (inactive) ~ merger transaction complete
CF Industries (CF)
Liberty Acquisition (LIA)
Bank of America (BAC)
Molson Coors (TAP)
Pfizer (PFE)
Allergan (AGN)
Schering Plough (inactive) ~ merger transaction complete
Apple (AAPL)
Trian Acquisition (inactive)
Liberty Media (LSTZA)
Carefusion (CFN)
Anadrako Petroleum (APC)
First American (FAF)
Lions Gate (LGF)
Synaptics (SYNA)
Oracle (ORCL)
Resolute Energy (REN)
Alkermes (ALKS)
Blockbuster (BBI)
Stream Global (OOO)
Blockbuster b shares (BBI.B)
Loral Space (LORL)


Top 15 Holdings by percentage of assets reported on 13F filing

1. Transdigm Group (TDG): 9.1%
   
2. Citigroup (C): 8.9%
   
3. PHH (PHH): 8.4%
   
4. Healthnet (HNT): 7.5%
   
5. Wellpoint (WLP): 6.9%
   
6. CIT Group (CIT): 5.2%
   
7. Affiliated Comp (ACS): 5.1%
   
8. Mead Johnson Nutrition (MJN): 4.7%
   
9. Cablevision (CVC): 4.1%
   
10. Xerox (XRX): 3.6%
    
11. Nabi Biopharmaceuticals (NABI): 3.6%
    
12. Energy Partners (EPL): 3%
    
13. Coinstar (CSTR): 2.5%
    
14. DirecTV (DTV): 2.5%
    
15. Depomed (DEPO): 2.4%
    

Third Point initiated quite a few brand new positions in the fourth quarter, but keep in mind that some of them are a result of coporate transactions. After all, Third Point focuses on event-driven strategies and often holds positions in numerous asset classes. Their CIT stake is most likely a result of a debt to equity conversion, while their positions in DTV and LSTZA are from the recent Liberty Media merger. Additionally, we detailed Third Point's new EPL position that was most likely a result of senior notes converting into equity.

Their Citigroup (C) stake is brand new and they brought it all the way up to their 2nd largest US equity long. Additionally, their brand new position in baby formula producer Mead Johnson (MJN) intrigued us because we're seeing more and more prominent hedge funds add MJN.

On the selling side, they dumped CF (previously their 3rd largest US equity holding), Bank of America which was previously their fifth largest, and Popular which was their sixth largest. Interestingly they only held their Popular (BPOP) stake for one quarter.

It was also interesting to see Loeb sell over half of his Greenlight Capital Re (GLRE) stake. This has always been a very small position for them, but they've held it for quite a long time so it was curious to see them all of a sudden adjust it. GLRE of course is the casualty and property reinsurer chaired by David Einhorn of hedge fund Greenlight Capital.

A major thing to keep in mind with Third Point is that the equities above are only one small portion of their portfolio. As we've learned in some of their past investor letters, Third Point has been active in distressed debt and other markets and those positions do not show up on 13F's. Assets reported on the 13F filing were $1 billion this quarter compared to $1.2 billion last quarter. Remember that these filings are not representative of the hedge fund's entire base of AUM.

We'll be tracking 40+ prominent funds in our fourth quarter 2009 hedge fund portfolio tracking series. We've already covered Seth Klarman's Baupost Group, Mohnish Pabrai's Investment Fund, Carl Icahn's hedge fund Icahn Partners, David Einhorn's Greenlight Capital, Stephen Mandel's Lone Pine Capital, John Griffin's Blue Ridge Capital, David Tepper's Appaloosa Management, Warren Buffett's portfolio, John Paulson's hedge fund Paulson & Co, and Lee Ainslie's Maverick Capital. Check back daily for our new updates.

Dan Loeb's Third Point Starts New Stakes In Popular (BPOP), TransDigm (TDG), & Health Net (HNT)

This is the third quarter 2009 edition of our hedge fund portfolio tracking series. If you're unfamiliar with tracking hedge fund movements or SEC filings, check out our series preface on hedge fund 13F filings.

Next up in our series is Dan Loeb's Third Point LLC. Third Point is a multi-billion dollar hedge fund that has seen annual returns greater than 15% since inception. Manager Dan Loeb focuses on event driven and value oriented investments and recently said he feels "like a kid in a candy store" due to all the distressed opportunities. In his past letter to investors, Loeb noted that he liked selective automotive debt plays. As noted in our hedge fund performance numbers post, Third Point was up 6.4% for August and 5.1% for September and were up 27.8% year-to-date at that time. For more market insight, definitely check out Dan Loeb's recommended reading list. Loeb started the fund back in 1995 with around $3.3 million in seed capital and today manages a multi-billion dollar portfolio. For some of his market insight and general thoughts on the industry, check out this video of a speech he gave.

Keep in mind that the positions listed below were Third Point's long equity, note, and options holdings as of September 30th, 2009 as filed with the SEC. We don't cover every single portfolio maneuver, as we instead focus on all the big moves. All holdings are common stock unless otherwise denoted.


Some New Positions (Brand new positions that they initiated last quarter):
Listed by their largest new stake first, and descending down
Popular (BPOP)
Transdigm (TDG)
Healthnet (HNT)
Wellpoint (WLP)
Cablevision (CVC)
American Water Works (AWK)
CareFusion (CFN)
First American (FAF)
Synaptics (SYNA)
Dana Holding (DAN)
Coinstar (CSTR)
Capitalsource (CSE)
Barclays (BCS)
Alkermes (ALKS)
Blockbuster (BBI)
Blockbuster B shares (BBI.B)
Loral Space & Communication (LORL)


Some Increased Positions (Positions they already owned but added shares to)
Schering Plough (SGP): Increased by 300% - inactive now due to buyout
Molson Coors (TAP): Increased by 45.5%
Pfizer (PFE): Increased by 40.7%
Pepsi Bottling Group (PBG): Increased by 33.3%
PepsiAmericas (PAS): Increased by 25%
Wyeth (WYE): Increased by 24% - inactive now due to buyout


Some Reduced Positions (Some positions they sold shares in)
Bank of America (BAC): Reduced by 54.9%
Phoenix Companies (PNX): Reduced by 7.3%


Flat Positions (Stakes with no change in amount of shares owned since Q2)
Ligand Pharma (LGND), Oracle (ORCL), Biofuel Energy (BIOF), Trian Acquisition (TUX), Greenlight Capital Re (GLRE), Lions Gate Entertainment (LGF), Liberty Acquisition (LIA), Liberty Media (LMDIA), Allergan (AGN), Hewlett Packard (HPQ), Anadarko Petroleum (APC), Apple (AAPL), PHH (PHH), Depomed (DEPO), and Nabi Biopharma (NABI).


Removed Positions (Positions they sold out of completely)
Yahoo (YHOO)
Sun Microsystems (JAVA)
Transatlantic Holdings (TRH)
Quest Communications (Q)
Legg Mason (LMI)
Maguire Properties (MPG) - we had covered them selling back in July
Guaranty Financial (GFGFQ)


Top 15 Holdings by percentage of assets reported on 13F filing

1. Wyeth (WYE): 15.2% (inactive, bought out by Pfizer)
   
2. PHH (PHH): 7.1%
3. CF Industries (CF): 5.5%
4. Liberty Acquisition (LIA): 5.2%
5. Bank of America (BAC): 4%
6. Popular (BPOP): 4%
7. Transdigm (TDG): 3.9%
8. HealthNet (HNT): 3.7%
9. Molson Coors (TAP): 3.1%
10. Pfizer (PFE): 3%
11. Wellpoint (WLP): 3%
12. Cablevision (CVC): 2.8%
13. Depomed (DEPO): 2.3%
14. Allergan (AGN): 2.2%
15. Hewlett Packard (HPQ): 2.2%
    

Overall, the vast majority of changes in Dan Loeb's portfolio were via either buying completely new stakes, or selling out of holdings entirely. There were only a few partial adjustments to the portfolio. In terms of brand new stakes, their positions in Popular (BPOP), Transdigm (TDG), and Healthnet (HNT) were all pretty large as they landed in the top 10 of Third Point's long US equity portfolio. It's also worth highlighting that their new stakes in Wellpoint (WLP) and Cablevision (CVC) were not far behind in terms of size either.

Notable positions that they sold completely out of include Yahoo (YHOO) and Sun Microsystems (JAVA). Those positions had previously been their 6th and 7th largest US equity holdings when we covered Loeb's portfolio in Q2 of this year. One position they still hold onto but did sell some of was their large stake in Bank of America (BAC). They just started that position last quarter and in one of his past investor letters, Loeb mentioned BAC could see ~$3 per share in normalized earnings power. It is interesting though that he has already sold more than half of his position.

You'll note the vast increase in their Schering Plough stake, but keep in mind that the security is now inactive as it was bought out by Merck earlier on. So, it appears that Loeb and company were playing the arbitrage of that buyout. In another arbitrage play, Third Point boosted their holdings in Wyeth (WYE) as they were set to be bought by Pfizer (PFE). And speaking of Pfizer, Third Point also increased their stake there and it is notable seeing how David Einhorn of hedge fund Greenlight Capital is also very fond of PFE.

Overall though, not terribly too much to report on in terms of portfolio changes as they continue to play their event driven game. Keep in mind that Third Point also operates in the distressed arenas and we cannot see those portfolio holdings as the SEC only requires hedge funds to file on their equity, options, and note positions in US markets. We have already covered the fact that Loeb was seeing tons of opportunities in the distressed space a few months back. So, just realize that these equities are not representative of their entire portfolio. In terms of other recent activity of out Loeb's fund, they filed a 13G on Energy Partners (EPL) not too long ago which we also detailed.

Assets from the collective holdings reported to the SEC via 13F filing were $1.2 billion this quarter compared to $901 million last quarter, so an increase of around $299 million or so invested on the long side in US equities and notes. Please keep in mind that when we state "percentage of portfolio," we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), the percentages are skewed. Realistically, the position percentages are more watered down in their actual hedge fund portfolio.

This is just one of the 40+ prominent funds that we'll be covering in our Q3 2009 hedge fund portfolio series. We've already covered Seth Klarman's Baupost Group, Bill Ackman's Pershing Square, and Stephen Mandel's Lone Pine Capital. Check back daily as we'll be posting up a new hedge fund's portfolio each morning.