Dan Loeb’s letter to Third Point investors for the third quarter ended September 30, 2024. Read the full letter here.
Dear Investor:
During the Third Quarter, Third Point returned 3.9% in the flagship Offshore Fund.
The top five winners for the quarter were a private position in R2 Semiconductor, Pacific Gas and Electric Co. (NYSE:PCG), Vistra Corp. (NYSE:VST), KB Home (NYSE:KBH), and Danaher Corp (NYSE:DHR). The top five losers for the quarter, excluding hedges, were Bath & Body Works Inc. (NYSE:BBWI), Amazon.com Inc. (NASDAQ:AMZN), Advance Auto Parts Inc. (NYSE:AAP), Alphabet Inc. (NASDAQ:GOOGL) and Microsoft Corp (NASDAQ:MSFT).
Review and outlook
During the Third Quarter, Third Point Offshore generated gains of nearly 4%, bringing year-to-date returns to 14%, net of fees and expenses. Global equity markets continued their strong performance, but returns were driven by substantially more market breadth than over the previous year and a half. The “Magnificent Seven” trailed the broader market (albeit modestly) for the first time since Q4 2022. Rate sensitive stocks and cyclicals significantly outperformed as the market shifted its focus to the Fed’s long-awaited easing cycle. As we highlighted in our Second Quarter letter, our portfolio has a broad range of investment themes outside of large cap tech. These types of investments in industrials, utilities, materials, and other housing-sensitive stocks led the portfolio for Q3.
For most of the nearly thirty years I have run Third Point, the market has been inexorably climbing a wall of worry. At times, the worry turns to despair, most recently in the beginning of August, when the Nikkei inexplicably tanked roughly 20% in a few days and volatility in the US exploded to nearly 70 from 16, all while US markets dropped 6%. Many pundits saw this as a warning that the market had more room to drop and that, in the best case, stocks had become “un-investable” through the election. While we took our lumps for a few days, we stayed committed to our positions, took the view that the market rotation would continue, and increased our investments in event-driven and value-oriented stocks.
Equity Updates
DSV
During the Third Quarter, we initiated a new position in the Danish freight forwarder DSV (CPH:DSV). DSV has come a long way from its origins as a Nordic road-hauler to become the world’s third largest freight forwarder, with a formidable track record of consolidating the fragmented global freight forwarding industry. We believe the company has an impressive culture that is systems-driven and returns-focused. DSV has generated an approximately 20% EPS CAGR over the past 10 years and is widely recognized as the best-in-class operator, with industry-leading growth and profit margins.
DSV emerged as the leading bidder in the auction of DB Schenker, a subsidiary of German state-owned Deutsche Bahn AG, and one of its largest competitors. DB Schenker is similar in size to DSV but only half as profitable. We believe the integration and synergy capture expected from this combination will follow a proven playbook and drive earnings accretion in excess of 30%. We have analyzed DSV’s many acquisitions and observed that they follow a pattern of swiftly migrating the target onto DSV’s IT system, culling low-margin business, and rightsizing the cost structure, resulting in the target’s margins reaching DSV’s best-in-class margins within two years.
Cinemark
Earlier this year we took a stake in Cinemark (NYSE:CNK), the third largest movie theater chain in the U.S. We believe Cinemark is poised for underappreciated growth over the next few years as the supply of theatrical releases rebounds from pandemic- and strike-related headwinds. In addition, we believe Cinemark will gain share from undercapitalized competitors.
There is no shortage of skeptics about the move theater business. In 2020 the outlook for domestic cinemas looked bleak: the rapid rise of streaming, combined with behavior changes from the pandemic, cast doubt on whether people would ever go to theaters again. Regal Cinemas filed for bankruptcy. AMC became a meme stock.
Against this inauspicious backdrop, Cinemark has demonstrated resilient financial performance. Consider that in 2023, counterintuitively, Cinemark reported higher free cash flow than they did in the two years prior to the pandemic. Yet, Cinemark stock entered 2024 trading 70% below pre-pandemic levels (a mid-single digit multiple on trailing 12-month free cash flow), suggesting market participants feared free cash flow would drop precipitously and never recover. We disagree with this view and believe the multi-year outlook for Cinemark has never been more robust.
Credit Updates
Corporate Credit
Third Point’s corporate credit book generated a 3.5% gross return (3.4% net) during the quarter, contributing 50 basis points to performance. That puts year-to-date performance at +8.3% gross (8.2% net), in line with the high yield index. The summer proved anything but cruel for high yield, with the market returning 5.3% during the quarter, in line with the strong performance of the S&P 500. Spreads tightened marginally with most of the return driven by the decline in interest rates.
Structured Credit
The Structured Credit portfolio contributed 20 basis points in the quarter, driven by Treasuries and credit spreads rallying. While the Treasury market has likely overestimated the magnitude of potential Fed rate cuts for this year, we took advantage of that market window and exercised our call rights on eight reperforming mortgage deals this quarter. We priced a new mortgage securitization in August with AAA’s pricing inside of 5%, closer to investment grade yields we saw in 2019 and early 2020. As insurance companies and private credits funds actively look for investment grade risk, we have been able to access, in our view, attractive cost of funds across structured credit loans. Given the decline in new mortgage originations and newly issued mortgage-backed securities, we have seen an improvement in the technical backdrop for existing securities and loans. We believe this dynamic gives us an advantage as we continue to sell and optimize our existing mortgage portfolio.
Private Position Update: R2 Semiconductor
In March, we disclosed that we were supporting R2 Semiconductor, a private company in our Third Point ventures portfolio that we invested in over 15 years earlier, as it sought to enforce its patented technology against Intel. The technology, developed by R2’s Founder David Fisher, relates to integrated voltage regulation, which plays an essential part in reducing power consumption by microchips while maintaining product reliability.
At the end of August, Intel announced that its dispute with R2 had been fully settled in all jurisdictions. The terms are confidential, but we are pleased with the outcome, which resulted in a significant gain in the position for the quarter.
Sincerely,
Daniel S. Loeb
CEO
Third Point
Read the full letter here and more hedge fund letters here.