9 February 2023
Third Point Publishes Q4 2022 Investor Letter
Highlights:
- Third Point uses Q4 volatility to bring up exposures, initiating new positions and adding to others that were trading at attractive valuations
- New position in American International Group
- Increased exposure to Bath & Body Works, DuPont de Nemours
- Updates on Colgate-Palmolive, Pacific Gas & Electric
Third Point LLC, the Investment Manager of Third Point Investors Limited (“TPIL” or the “Company”) announces it has published its quarterly investor letter for Q4 2022. The full letter can be accessed at the Company’s website: https://www.thirdpointlimited.com/resources/portfolio-updates
Performance Key Points:
- Third Point LLC (“Third Point” or the “Investment Manager”) returned 1.2% in the flagship Offshore Fund (the “Master Fund”) during the fourth quarter of 2022, compared with the S&P 500 Index return of 9.9% and the MSCI World Index return of 7.5% in the same period.
- The top five positive contributors for the quarter were Pacific Gas & Electric Co., Bath & Body Works Inc., Twitter Inc., DuPont de Nemours Inc., and TJX Companies Inc.
- The top five negative contributors for the quarter were SentinelOne Inc., Private A, Cano Health Inc., Amazon.com Inc., and The Walt Disney Co.
Outlook and Market Commentary:
- Results for the fourth quarter lagged the performance of relevant indices, largely due to Third Point’s defensive positioning, weakness of several large positions, and the write-off or markdowns in crypto-related private investments.
- On the positive side, the Investment Manager’s largest position, Pacific Gas & Electric Co., appreciated 30%; Bath & Body Works Inc., a new activist position, also rose 30%; and the Twitter risk arbitrage position was held to a close.
- While the Investment Manager judges these results as lacklustre, it used the market weakness in December to increase equity exposures, initiate several new positions and add to others that were trading at attractive levels.
- Notwithstanding the recent rally in risk assets, which Third Point views as a technical phenomenon that will not be sustained in the longer term, it sees the current environment as idea for an approach to investing that focuses on companies trading at attractive valuations with catalysts to realize full value. This style of event-driven investing, for which the current market conditions are ideal, is Third Point’s core competency and the foundation upon which the firm was built.
- Credit remains a mainstay of the portfolio and Third Point sees both the asset-backed and corporate credit strategies as benefiting in the environment ahead.
Portfolio Updates
- New Position in American International Group (AIG)
- Alongside an operational turnaround, AIG is repositioning itself as a pure-play P&C insurer via the IPO of its life insurance subsidiary, Corebridge.
- Third Point believes the proceeds to come from the sell-down of the remaining Corebridge stake will be redeployed primarily towards share repurchases. There is also an opportunity to streamline the corporate expense base with the simplification of AIG’s business as the company no longer operates within the conglomerate structure that governed its operations until a decade ago.
- Update on Bath & Body Works (BBWI)
- Third Point initiated a new position in retailer Bath & Body Works in Q3 2022 but added significantly in Q4. The company, which sells personal care and home fragrance products, separated from Victoria’s Secret in late 2021 and has struggled to find its footing in the public markets.
- Despite the recent struggles, Third Point believes the company can change the narrative, improve its earnings power, and create a more premium valuation.
- The company should generate substantial earnings growth driven by recharged sales, margin recovery to more normalized levels, and the deployment of excess cash to continued share repurchases. The real prize, though, would be if new CEO Gina Boswell can seize on the potential to transform the business from a largely US retailer into a more global direct-to-consumer, home and personal care brand.
- Third Point will continue to engage in a wide-ranging dialogue with certain members of the board and management.
- Update on Colgate-Palmolive (CL)
- Colgate, a consumer staples company, remains one of the firm’s largest equity positions: the company offers defensive growth at a reasonable valuation, and Third Point continues to see the potential for shares to deliver an attractive risk-adjusted return over the coming years.
- While Q4 results were disappointing, Third Point believes the company is on the road to delivering more predictable returns moving forward. Organic growth remains strong, and the Investment Manager expects that to translate into earnings growth as execution improves, margins recover and external pressures calm down.
- Recent board changes have allowed the company to focus on portfolio management. Third Point is continuing to engage with the company and sees many appealing paths to additional value creation.
- Update on DuPont de Nemours (DD)
- The Investment Manager added to its investment in DuPont de Nemours, a specialty chemical company, which is undergoing a corporate transformation.
- In November, DuPont divested its most cyclical and lowest margin business segment. Following the divestiture, the improved DuPont still trades at a 30% discount to its peer group.
- Third Point believes the company is laser-focused on closing this gap: proceeds from the divestiture will be redeployed to repurchase nearly 15% of outstanding shares; there should be a resolution of outstanding legal claims against the company; and the new business structure will all drive meaningful value for shareholders.
- Update on Pacific Gas & Electric Co. (PCG)
- As Third Point enters its fifth year as investors in PCG, first as bondholders and then as shareholders, it remains as enthusiastic as ever about the company’s potential. Even with a 63% increase in the share price over the prior six months, Third Point believes the company remains significantly undervalued.
- In addition to improved management execution, this trajectory is significantly de-risked by recent supportive legislative initiatives in California and improving regulatory certainty.
- Shareholders will also benefit from an expected reinstatement of a dividend in the middle of 2023. This should serve as a catalyst for increased institutional ownership. Investors are also gaining comfort around the reduction in the Fire Victims’ Trust ownership stake in the company, which has declined to 9% from 24% with limited market impact.
- Update on Corporate and Structured Credit
- Third Point’s credit portfolio was positioned and continues to be positioned based on the fundamental view that the consumer remains in good shape. Unemployment is at record low levels and consumer balance sheets were significantly fortified with Covid-19 relief measures. The huge increase in housing prices over the last few years combined with mortgage amortisation provides significant credit support to the residential mortgage-backed securities (RMBS) market.
- By contrast, corporate debt levels are high as issuers have gorged on the low interest rate environment of the last several years. As a result, Third Point’s structured credit exposure is currently at a relatively high level, while its corporate credit exposure is much lower.
- At present, corporate credit spreads appear tight given the uncertain outlook. The Fed may be close to done raising interest rates, but the Investment Manager expects increasing stresses in the credit markets as the impact of higher interest rates cycles through balance sheets. Investment and business models predicated on cheap money are no longer economic, and while much of this impact lies hidden in private markets, Third Point expects these stresses to create an increasing number of opportunities this year in the public markets.
- Ends -
Press Enquiries
Notes to Editors
About Third Point Investors Limited
www.thirdpointlimited.com
Third Point Investors Limited (LSE: TPOU) was listed on the London Stock Exchange in 2007 and is a feeder fund that invests in the Third Point Offshore Fund (the Master Fund), offering investors a unique opportunity to gain direct exposure to founder Daniel S. Loeb’s investment strategy. The Master Fund employs an event-driven, opportunistic strategy to invest globally across the capital structure and in diversified asset classes to optimize risk-reward through a market cycle. TPIL’s portfolio is 100% aligned with the Master Fund, which is Third Point’s largest investment strategy. TPIL’s assets under management are currently $700 million.
About Third Point LLC
Third Point LLC is an institutional investment manager that actively engages with companies across their lifecycle, using dynamic asset allocation and an ethos of continuous learning to drive long-term shareholder return. Led by Daniel S. Loeb since its inception in 1995, the Firm has a 36-person investment team, a robust quantitative data and analytics team, and a deep, tenured business team. Third Point manages approximately $12.7 billion in assets for sovereign wealth funds, endowments, foundations, corporate & public pensions, high-net-worth individuals, and employees.
