Daniel Loeb, the founder and CEO of Third Point plans to follow his playbook last year and ignore the adage to “sell in May” and go away.” His firm beat the S&P 500 by more than 2% in the first quarter.
Loeb expects a generally good environment for U.S. equities
In a letter to investors, Loeb said his firm is finding opportunities in equities in Japan and the United States, sovereign debt, structured credit.
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The activist hedge fund manager noted that the real excitement is happening overseas this year. According to him, investors were encouraged by the accommodative monetary policy in China, Europe, and Japan to adopt QE pattern recognition and invest in markets where central banks opened pocket books.
Loeb remains positive in the United States because he believes that country’s economy will improve over the next few quarters. He also thinks that the Federal Reserve is not in a hurry to raise interest rates. He expects a gradual increase in interest rates.
The activist investor is expecting a good environment for equities in the United States, and the monetary policy will remain flexible.
Yum Brands in the early stages of turning around its Chinese business
Over the past few months, Third Point acquired several positions of significant size that reflect geographically and sector diversity. Loeb revealed that his firm acquired a huge stake in Yum Brands, the second largest restaurant chain worldwide. The company is the operator of Kentucky Fried Chicken, Pizza Hut, and Taco Bell restaurants.
Loeb explained that Third Point initiated a position in Yum Brands because the company is in the early stages of turning around from its recent problems in China.
Yum Brands is confronting several challenges in China including a food safety issues involving two suppliers, and a strong competition. Last year, it was reported that its supplier, Shanghai Husi was using expired meat and unhygienic practices. In 2012, the Chinese government found that the chickens supplied to Yum Brands by Liuhe Group have antibiotics level higher than the prescribed standards.
According to Loeb, his firm examined Yun Brands’ recovery potential and whether its status as a repeat offender caused an irreparable damage to its brand in China.
Third Point’s research showed that the “KFC brand continues to resonate strongly with local consumers,” and they believe that its food is safe or at least as safe as other restaurant option.
Loeb said Yum Brands will benefit from the growth of middle class in China. He also noted that the management of the company perceives an opportunity for more than 20,000 KFC and Pizza Hut restaurants in the country.
He said, “With China stabilizing and on the road to recovery, we see scope for significant earnings growth ahead as profits recover in the near to medium term and exceed prior peak in the long-term as the company opens more restaurants to meet the needs of the expanding Chinese middle class.”
The stock price of Yum Brands increased almost 7% to $91.90 per share on Friday.
See the full letter here