Activist Loeb expecting action in Actavis

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Bobby Raines 06/09/2014

Individual investors frequently follow the so-called "smart money" into trades. The most famous smart money investor is probably Warren Buffett. Given Buffett's returns, trying to ape his investment style seems like a pretty good idea.

But Warren Buffett isn't the only celebrity investor; he's just the most famous. There are plenty of other hedge-fund managers who garner lots of attention from the media and investors. Most of those other investors don't have a track record as long a Buffett's, since unsuccessful money managers rarely stay in the business, or the public eye, for very long.

One of the newer (relative to Buffett anyway) celebrity money managers is Daniel Loeb. Loeb started Third Point Management in 1995 with about $3.3 million dollars. The company now boasts assets under management of close to $10 billion and returns of about 25 percent per year.

Unlike Buffett, who likes to find good companies and tends to make himself an ally of whoever is in charge, Loeb tends to take a more antagonistic approach, choosing to attack, frequently in scathing letters, any executive or management team that he believes is hurting shareholder value.

Loeb is perhaps most famous for revealing that then Yahoo ( YHOO ) CEO Scott Thompson did not have the computer science degree that appeared in his company biography. The source of the error is still somewhat murky, but the end result was that Thompson left the company after just five months on the job and Loeb and two other men Loeb picked were awarded seats on the company's board, ultimately helping to pick current CEO Marissa Mayer.

Loeb is also currently engaged in battles with Sony ( SNE ) and auction house Sotheby's ( BID ), both of which he believes could take steps to unlock more value for shareholders.

Third Point bought 2.5 million shares of generic drug maker Actavis ( ACT ) during the first quarter. Loeb hasn't fired any shots at the company yet, but given that the stock is now his largest holding, and the stock has leveled off since peaking in February.

I won't pretend to know what Loeb's plan for his investment in Actavis is, but the goal of all hedge-fund managers who take long positions in stocks is for them to go up. Whether Loeb plans an activist campaign, or is just expecting the stock to make a run higher, the reason he bought the stock is that he expects to sell it at a higher price at some point down the road.

For its part, Actavis acquired Warner-Chilcott in 2013 and in the process of acquiring Forest Labs ( FRX ). Unlike the biotechnology and name-brand drug business, where companies can charge a premium for a few name-brad treatments, the generic drug business is all about volume. Since generic drugs are, by definition, off patent, any drug company that wants to can sell these drugs. That means margins tend to be thin, and much of the focus is on volume. The acquisitions of Warner-Chilcott and Forest give the company more products to sell, which, provided the company can make itself as efficient as possible, should help it be more profitable once it finishes integrating the two acquired companies.


Chart courtesy of stockcharts.com

Traders who want to play along with Loeb in betting on some upside for Actavis could consider a July 190/195 bull-put credit spread for a 65-cent credit. That's a 14.9% return, which is 136.35% on an annualized basis (for comparison purposes only). This position will return a full profit so long as the stock is above $195 at July expiration, giving it about 6% downside protection.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com


This article appears in: Investing , Options

Referenced Stocks: YHOO , SNE , BID , ACT , FRX

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