Investors trying to beat the market could do worse than following the instance of Daniel Loeb. The billionaire is the cash manager for Third Point, the hedge fund he founded nearly thirty years ago. During that point, he turned $3.4 billion in seed money right into a financial powerhouse with nearly $12 billion in assets under management.
Loeb has been called “probably the most successful hedge fund managers of his generation” by The Wall Street Journal, generating average annualized returns of 16% over the span of 28 years, beating the returns of the S&P 500 by nearly 6%.
The billionaire investor has long stressed investing in “high-quality corporations trading at reasonable valuations” but doesn’t lose sight of “their prospective growth.”
With that as a backdrop, let us take a look at two stocks Loeb bought within the second quarter.
1. Apple
Third Point’s largest latest position throughout the second quarter, by a good margin, was Apple (NASDAQ: AAPL). Loeb bought 1.95 million shares of Apple value roughly $411 million and representing nearly 5% of Third Point’s portfolio, making it his seventh largest stake.
Loeb addressed the acquisition at length in Third Point’s shareholder letter, noting he purchased Apple shares in April. A fast have a look at the stock chart reveals that the stock was selling for 26 times earnings, a reduction to a multiple of 27 for the S&P 500 on the time. Indeed, Loeb noted Apple’s “relative multiple had compressed toward a multi-year low,” thanks partially to “several years of stagnant growth.”
The compelling valuation aside, Loeb cited several aspects that made Apple an intriguing pick, including the corporate’s ecosystem of two.2 billion lively devices and market-leading positions in several form aspects across quite a few key markets.
He also noted investor fears that Apple can be an “artificial intelligence (AI) loser,” however the billionaire got here to a special conclusion. Loeb believes the approaching release of Apple Intelligence — a number of user features steeped in generative AI — will drive “meaningful demand inside Apple’s installed base.” He went on to posit this “AI-related demand could drive a step change in improvement in Apple’s revenue and earnings over the subsequent few years.”
I feel Loeb’s thesis is correct on the mark. Apple’s revenue is up lower than 1% for the primary nine months of its 2024 fiscal 12 months after falling 3% in fiscal 2023, because of weak iPhone sales. Nonetheless, inflation fell to 2.9% in July, marking its lowest rate in three years. Improving prices will give consumers more discretionary income. Moreover, Apple announced the date for its annual iPhone reveal, scheduled for Sept. 9, when the corporate is anticipated to offer details for an AI-powered iPhone. This can little doubt spark demand among the many Apple faithful, fueling a booming upgrade cycle for the iPhone 16.
2. Taiwan Semiconductor Manufacturing
Third Point significantly increased its stake in Taiwan Semiconductor Manufacturing (NYSE: TSM), sometimes called TSMC, throughout the second quarter. Loeb bought an extra 850,000 shares of TSMC, increasing his total holdings to 2 million shares value roughly $352 million and representing 4% of Third Point’s portfolio, making it his tenth largest position.
Loeb has been consistently increasing Third Point’s stake in TSMC since initiating the position in May of 2023. He noted the corporate is coming off its “worst 12 months for the reason that Global Financial Crisis,” making it a compelling opportunity. Loeb believes the mixture of cyclical recovery and robust demand for AI will drive “substantial earnings growth for the corporate.”
TSMC occupies a singular position within the industry, in line with Loeb, with a market share of greater than 90% for “leading-edge semiconductor manufacturing,” which incorporates the chips used for AI. While AI currently represents a “relatively small percentage” of TSMC’s sales, he sees TSMC’s “AI revenue growing by multiples in the approaching years.”
I feel Loeb has hit the nail on the top. TSMC’s dominant market share of high-end processors makes it an odds-on favorite to profit from these secular tailwinds. Moreover, after suffering declines of greater than 3% last 12 months, the smartphone market has rebounded in 2024, expected to notch growth of nearly 6%, accoring to data supplied by market intelligence firm IDC. As one among the leading providers of smartphone chips, this return to growth can even boost TSMC’s results.
Within the second quarter, TSMC’s revenue jumped 40% 12 months over 12 months, while earnings per share climbed 36%. Management expects its growth streak to proceed, guiding for revenue growth of 34% within the third quarter. It’s value noting that TSMC tends to issue conservative guidance, so the outcomes could well be higher.
The adoption of AI continues to realize steam, and estimates concerning the ultimate size of the market proceed to ratchet higher. While estimates vary, the marketplace for generative AI is anticipated to be value between $2.6 trillion and $4.4 trillion annually over the approaching decade, in line with global management consulting firm McKinsey & Company.
The economic recovery and adoption of AI will provide multiple tailwinds to drive TSMC higher.
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Danny Vena has positions in Apple. The Motley Idiot has positions in and recommends Apple and Taiwan Semiconductor Manufacturing. The Motley Idiot has a disclosure policy.
Billionaire Daniel Loeb Goes Bargain Hunting: 2 Stocks He Just Bought was originally published by The Motley Idiot