Daniel Loeb, founder of Third Point LLC, is one of the most successful activist investors of the last decade. I had the chance to assist in a class led by him during my years at Columbia Business School. He is just as you might imagine him to be: smart, cold and assertive. Here I want to take a look at three of his positions and answer one question: should you invest in these companies as well?
Betting on the bidding house
Dan Loeb has accumulated a 6% stake in the leading auction house, Sotheby's (NYSE: BID ) . Even with the stock up by more than 100% since 2010, I think there is still room for continued outperformance. That's partly thanks to up-and coming property sales and management changes that should help propel operating cash-flow margins up to 38%, which was the level attained during the 2010 financial year (the current level is just below 31%).
With an economy in full recovery (at least in developed markets) and a duopoly in place (Sotheby's shares the +$10 billion a year market with privately held Christie's) I think Loeb and his fund are, once again, betting on a winner. Sotheby's trades at 25 times earnings, but good things are very rarely cheap.
One Buffet stock pick by Loeb
Loeb has recently been adding shares to his position in Disney (NYSE: DIS ) . This company has a very strong business that doesn't seem to be diminishing with age. Basically, parents know that with any product by Disney, their children will get high-quality and safe entertainment. This is very difficult (if not impossible) to replicate. Better yet, this phenomena is truly international and extends from theme parks to movies to video games.
Moreover, the stock's valuation does not seem very rich. Disney trades at 18 times 2013 earnings, while the company is growing its top line by 4.5% year-over-year (yoy). In a more in-depth analysis, Disney also looks fairly priced. Summing up all the parts that compose the company (ESPN, the recently acquired Lucas Films, all the theme parks), its not difficult to realize that there is a lot of value to be unlocked going forward. Besides, after some heavy investments and acquisitions (such as Lucas Films) its very probable that a dividend increase is just around the corner. Go long on Disney, because some things never change.
Price looks attractive
Loeb has been adding shares of CF Industries Holdings (NYSE: CF ) . The reason? Probably the stock's price and high M&A probabilities. As a matter of fact, in the past CF was subject of a hostile bid from Agrium, the Canadian fertilizer producer.
Of course CF's seemingly low 7.9 times P/E multiple can be explained through the expectations of an oversupplied market. According to the Financial Times, "the global fertilizer industry faces a large surplus as new production plants come on stream after a $90 billion investment spree." That said, the company's great cost structure (thanks to its access to low cost North American natural gas) and stock's price will defend investors from potential future pricing pressures on fertilizers. I am sure Daniel Loeb is well aware of the risks, but "value is what you get and price is what you pay." A low-cost producer at a very low valuation level in an industry that is prone to M&A makes me think that CF could be a good buy at the current level.
Following a great investor's ideas is always a good way to learn. Daniel Loeb has been a consistent alpha generator, and I believe he will continue in his current path as years go by. You should consider his ideas and concepts at the time of adding a new position into your own portfolio.
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