Morning Brief: Third Point Slashes Credit Book, Names New Activist Target

Dan Loeb’s Third Point said it has cut its credit exposure by more than two-thirds since the beginning of 2016. “Spreads are near the levels reached in 2007 but interest rates are 200 basis points lower today, creating little opportunity for total return,” the multistrategy firm writes in the third-quarter letter to investors in its Third Point Offshore fund. It points out that in 2016 the firm capitalized quickly on dislocation in the energy sector.

However, these days it does not see “deep weakness” in any area or geography. It did say there is stress in the telecom and retail space but added, “we do not believe the secular challenges are fully reflected in security prices yet.” Third Point also told clients it cannot forecast the timing of the next credit cycle, adding, “we are late in this economic cycle, corporate leverage is high, and interest rates are increasing. Stay tuned.”

Elsewhere in the report, Third Point disclosed it owns a stake in Dover Corporation, an industrial conglomerate the hedge fund says has a leading share in several highly consolidated end markets. “Dover shares have materially underperformed the industrial peer group over the three-year period preceding our investment,” Third Point stated, indicating this is also its newest activist target. “We have been engaged in a constructive dialogue with management regarding several compelling value creation opportunities.” Shares of Dover jumped 6.1 percent, to close at $94.95.

Third Point also continues to hold a position in DowDuPont. The hedge fund firm initially disclosed a position in Dow Chemical in its fourth quarter 2013 letter. It added two board members in 2015 as part of a settlement. Dow and DuPont merged on September 1. The company said it would split into three companies, but Third Point and Trian Fund Management have different suggestions for dividing the chemicals giant into smaller parts. In its third-quarter letter, Third Point said the stock trades at just 8.6 times consensus cash flow estimates for 2019, “a substantial discount to its sum-of-the-parts” estimate. So, it continues to see “significant upside.”

Third Point Offshore gained 3.4 percent in the third quarter and is now up 14.5 percent for the year.

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UBS cut its price target on Chipotle Mexican Grill, from $380 to $345, and lowered its estimates, citing “still challenged trends and weak online review data.” Last December the casual dining chain agreed to add four board members as part of a compromise settlement with Bill Ackman’s Pershing Square Capital Management. At the end of the second quarter, Pershing Square was the largest shareholder, while the stock was the activist’s third-largest long. Shares of Chipotle slipped slightly, by 0.16 percent, to close at $324.76.

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Tiger Cubs Coatue Management and Tiger Global Management were among a number of investors who participated in the $4 billion Series C financing for Meituan-Dianping, which calls itself China's largest service-focused e-commerce platform. The company says it has more than 280 million annual active buying consumers and more than five million annual active local merchants across China.

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Shares of Procter & Gamble fell nearly 4 percent, to close at $88.25, after the consumer products giant reported disappointing revenues, especially at its Gillette unit. The company claims to have won its proxy fight last week with Nelson Peltz of Trian Fund Management.