Dan Loeb’s Third Point Several Big Winners During Q1 Despite Its Losses

Third Point’s flagship Offshore Fund was down 11.5% for the first quarter, while its Ultra Fund lost 15.3%. The firm had about $16 billion in assets under management at the end of March. The CS HF Event-Driven Index was down 2.4% for the first quarter, while the S&P 500 was off by 4.6%, and the MSCI World Index fell 5%.

Third Point’s 13F filing for Q1

According to his 13F filing for the first quarter, Third Point LLC founder and Chief Executive Dan Loeb reduced his positions in some well-known tech firms, including Microsoft

MSFT
and Dell. He also sold some shares of EV maker Rivian Automotive, which has plummeted by more than 70% year to date, and financial software firm Intuit

INTU
.

The firm exited several tech firms entirely, including Asian ride-sharing firm Grab Holdings, AI lending platform Upstart Holdings, online real estate firm Opendoor Technologies, and cable and internet service provider Comcast

CMCSA
. Third Point also dumped all of its stakes in Walt Disney and online travel agency Expedia. All of these firms are down significantly year to date except Comcast, which is off by “only” about 14%.

Interestingly, the hedge fund exited AES

AES
Corporation, an energy firm, although it is down by about 10% year to date. In general, the energy sector is one of the few sectors that has been holding up during the recent volatility, as demonstrated by Archaea Energy, which Loeb also exited, although it is up by about 10% year to date. He also exited a commodity company: fertilizer maker CF Industries, which is up by 36% year to date.

Big winners and losers

Third Point’s new positions during the first quarter included railroad giant CSX

CSX
Corporation, which is off by more than 13% year to date, and aluminum giant Alcoa

AA
, which is up by about 4% for the year.

Other new additions to the fund’s portfolio include several big winners: Suncor Energy

SU
, which has skyrocketed 60% since the beginning of the year, hydrocarbon exploration and production firm Ovintiv

OVV
, up by 66% year to date, Cenovus Energy, up by about 90%, and miner and fertilizer company Mosaic, up by more than 45%.

In his first-quarter letter to investors, Third Point’s top five contributors were Shell, EQT, two unnamed macro positions, and Zendesk

ZEN
, which the fund bought more of during the first quarter. The fund’s five biggest detractors were SentinelOne, Intuit, Upstart Holdings, Rivian Automotive and Cie Financiere Richemont.

Big changes at Third Point

The fund made significant changes to the fund’s portfolio during the first quarter and in April, shifting to a far more defensive posture. These steps offered significant protection against further losses in April, resulting in a loss of 1%, compared to the S&P 500’s 8% loss and the Nasdaq’s 13% loss.

The Third Point chief is concerned about valuations in the current interest rate environment, geopolitical uncertainty and emerging weakness in key economies globally. The fund’s net exposure is lower and buying power higher than they have been at any other time over the last decade.

Third Point exited several large equity positions as part of these shifts and slashed its stake in SentinelOne, its second-largest and most volatile position. The fund also substantially hedged that position and reduced its leverage in the Ultra fund.

Loeb believes that “wringing out the excesses in the financial system will be bumpy and create clear winners and losers” before “normalization” is achieved, whatever that means in the current environment. As a result, he thinks this is a good time to short stocks, so he added to the fund’s single-name shorts during the quarter, replacing some of its baskets and market hedges.

Starting with its sizable investment in Shell last fall, he has found some interesting opportunities in energy and other cyclicals. During the first quarter, he initiated positions in oil and natural gas companies and other material companies he thinks will benefit from inflation, supply shortages and EV and renewable energy adoption.

“Bungled” energy policies

Loeb finds U.S. oil and gas companies “particularly interesting” due to what he sees as “ill-conceived energy policies enacted by governments in most developed countries.” Due to these policies, he expects commodities to be in short supply relative to demand.

He added that the adverse effects from these “bungled policies” are compounded by “well-intentioned but disastrous ESG initiatives that together resulted in a dearth of new investments in the sector.” He expects these companies to distribute much of their cash flow to shareholders.

He predicts that most of the firms Third Point has invested in will return more than 20% of their market caps annually for several years.

Third Point also expressed concerns about tech companies that rely on stock-based compensation and what he sees as “controversial accounting and reporting techniques.” He thinks many of these companies will have problems retaining employees as their stock prices plunge, resulting in increased dilution for future stock grants or higher cash wages, which could weigh on their margins.

Shell

Third Point continued to add to its position in Shell because it still trades at the same “deeply discounted” multiple that it did last year because of rising commodity prices. Loeb and his team are talking with management, board members and other shareholders about alternatives for increasing shareholder value while allowing the company to manage the energy transition.

Loeb feels that Shell’s collection of businesses ranging from deepwater oil to wind farms, gas stations and chemical plants is confusing and unmanageable. Many investors Third Point has spoken to agree that the company would be more successful after changing its corporate structure.

The fund highlights two key developments. Shell revealed a plan to redomicile its headquarters to the U.K. and create a single shareholder class. Second, the company’s liquified natural gas business is expected to play a significant role in ensuring Europe’s energy security amid the current geopolitical events.

Glencore

Third Point established a long position in the copper and nickel miner Glencore during the first quarter. Both metals should be critical for the transition to renewable energy. Renewable energy assets need three to 15 times the amount of copper used in conventional power generation. Electric vehicles use five times the amount of copper as internal combustion engine vehicles, and nickel is a crucial ingredient for EV batteries and energy storage.

Glencore’s thermal coal production has long deterred ESG-conscious investors from buying shares even though it mines metals essential for the transition to renewable energy. However, investors are starting to recognize that companies like Glencore are strategically important for Western democracies because their coal assets can help bridge Europe’s transition away from Russian energy.

As a result, what was previously a liability is now essential for Europe as it tries to reduce its dependence on Russian energy. In the meantime, the continent is building up its renewable energy capacity and awaiting the export expansion of LN

LN
G from the U.S., which will take at least three to five years.

PG&E

Dan continues to see immense value and potential in the embattled California utility Pacific Gas & Electric. PG&E emerged from bankruptcy two years ago, and its new CEO, Patti Poppe, has transformed it. California sits at the forefront of the energy transition with aggressive goals for renewable energy capacity and high EV adoption.

However, the state continues to face escalating risks from climate change. Extreme droughts and wildfires continue to plague California, presenting unique challenges to utilities in the state. He feels that Poppe has brought new, creative solutions to those challenges.

In April, PG&E posted “straightforward and uneventful” earnings results, and Loeb celebrates the simplicity of those results. The company trades at less than 12 times 2022 consensus earnings, while the utility index averages a multiple of 21 times. PG&E’s multiple is also lower than that of its closest peer in California, Edison International

EIX
, which trades at 15 times.

Although the Fire Victim Trust is an overhang on PG&E shares, the hedge fund expects the company to reinstate its cash dividend next year and possibly be added to the S&P 500. Over the next year, he looks for the company to re-rate toward industry averages and grow its earnings at an industry-leading 10% per year.

ConsenSys Software

Third Point remains active in its investment in the evolving digital asset ecosystem, focusing on companies Loeb believes are driving the “next-generation infrastructure of an increasingly decentralized economy.” During the first quarter, the fund participated in a follow-on round for ConsenSys Software, which it already owned equity in.

Ethereum

ETH
co-founder Joe Lubin leads the company, which Loeb sees as having established itself as a leading platform for consumers and developers to access Web 3.0. ConsenSys’ products provide access to the Ethereum ecosystem and many other protocols, including Polygon

MATIC
, another company backed by Third Point.

Consumers who have bought non-fungible tokens, engaged in decentralized finance, accessed a play-to-earn game or touched a decentralized autonomous organization have probably used ConesenSys’ digital wallet, MetaMask, which saw outstanding user growth last year. The company has increased its monthly active user base more than thirtyfold since 2020 and almost tripled it since August 2021.

ConsenSys Software’s Infura tooling suite is also a dominant Ethereum development platform, having helped over 430,000 builders test and deploy Blockchain IP. He believes this is only the beginning for the ConsenSys team.

Third Point invested in the company’s Series C funding round in November, which raised $200 million at a $3.2 billion valuation. It also participated in ConsenSys’ Series D round in March, which raised another $450 million at a $7 billion valuation.

Third Point feels the company is one of the best-positioned to capture additional users as the decentralized economy and web go more mainstream.

Michelle Jones contributed to this report.