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Founder and CEO of New York-based asset management firm Third Point, Dan Loeb has built a reputation for aggressive investments and aggressive market stances. Since founding the fund in 1995, Loeb has grown it into a Wall Street giant with approximately $16 billion in assets under management.
Loeb may be aggressive in his investment tactics, but he’s firmly rooted in reality, and a recent letter to clients clearly points to the worsening economic conditions since early summer. US inflation is still high and core CPI is rising month by month, but across the Atlantic the UK has suffered an epic fiasco hitting the pound as Liz his Truss Prime Minister’s economic plans collapse. Later, he faces the possibility of financial self-immolation.
But even in today’s uncertain times, Loeb sees an opportunity.
Let’s dig into the details of the two stocks that make up the bulk of Third Point’s portfolio. Obviously, Loeb sees these as quality strains, but he’s not the only one showing confidence in these names. According to the TipRanks database, Wall Street analysts rate both as ‘Buy’.
Ovintiv Inc. (OVV)
Ovintiv is a major player in the hydrocarbon exploration and production business, starting in the energy industry with assets in the Texas Permian Basin, the Oklahoma Anadarko field, and the Montney Formation on the British Columbia-Alberta border. With a market capitalization of $13 billion, his Ovintiv has benefited greatly from the current inflationary environment, especially rising oil and gas prices, and has posted eight consecutive quarters of revenue growth.
In addition to high revenues, Ovintiv significantly outperforms the overall market. Despite an overall bearish year, OVV shares are up 59% year-to-date.
Ovintiv is expected to report its third quarter results in early November, but the company’s second quarter earnings call provides a good indication of its current strength. Revenue for the second quarter reached $4.04 billion and net income he was reported at $1.36 billion. Management reported that the company posted its best quarterly cash flow and free cash flow in more than a decade.
These solid results enabled Ovintiv to double its share of capital return to shareholders from 25% to 50% of non-GAAP free cash flow. The increase came a quarter earlier than planned. Combining basic dividends and share buybacks, cash returns to shareholders reached $200 million in the second quarter. Ovintiv is targeting a capital return of $389 million in the third quarter.
A cash cow like Ovintiv can deliver strong returns to investors in both cash and stock appreciation, and is sure to attract the attention of heavy hitters. Dan Loeb purchased his OVV for the first time in the first quarter of this year. In the second quarter, he increased his holding by 172% to buy 3.87 million shares. As of August 15, his shares in the company amounted to his 6.12 million shares, worth more than $323 million.
The stock also caught the attention of Jefferies’ Lloyd Byrne. A five-star analyst was impressed with his Ovintiv, writing: OVV continues to trade at a discount to its peers despite its high-quality assets, improved balance sheet, strong management team and capital return strategy. ”
On a positive note, Byrne rates the stock as a Buy. His target price is $75, which means he could climb up to 42% over the course of a year. (To see Byme’s achievements, click here)
Overall, the bulls are definitely moving in this stock. Ovintiv has 10 recent analyst reviews, all of which are positive and unanimously strong buy consensus ratings. At $52.66, with an average target price of $67.60, the stock is expected to grow 28% over the next 12 months. (See his OVV stock forecast on TipRanks)
Colgate-Palmolive Company (CL)
Next up is Colgate-Palmolive, one of the most recognizable names in household cleaning, personal care and even pet care products. Colgate-Palmolive is best known for its eponymous products, which are Colgate’s toothpaste and his Palmolive dishwashing detergent line. It’s a classic defensive he’s one of his niches because he’s dealing with a product line that consumers need even in a tough recessionary environment. With that in mind, Colgate-Palmolive has earned him over $4 billion in each of the last eight quarters.
In its most recent quarter, 2Q22, Colgate-Palmolive posted $4.4 billion in total revenue, the highest in two years. However, while revenues are gradually increasing, profits are gradually decreasing. Second-quarter EPS was 72 cents per share, down 13 percent year-over-year.
Despite the decline, the company’s earnings easily supported its common stock dividend, which was announced last November 15 at 47 cents per share for the third quarter. The annual dividend is $1.88 for him, yielding a modest 2.6%, but the credibility of the dividend is key here. Colgate-Palmolive boasts that it pays “uninterrupted dividends” dating back to 1895.
This classic defensive stock was a logical addition to Loeb’s third point given the company’s defensive investment strategy. Loeb’s company took a new position in CL in the second quarter, buying 1.985 million shares. At current valuations, this stock is worth well over his $140 million.
Loeb explained a series of reasons why Third Point is a strong buyer of CL, stating: Second, we believe the company’s Hill’s Pet Nutrition business has meaningful hidden value that would be a premium multiple if separated from Colgate’s consumer assets. Third, there is an industry backdrop favorable to consumer health, including potential new entrants and consolidation through spin-offs. ”
Deutsche Bank analyst Steve Powers has a positive outlook on the company’s forthcoming third quarter print (October 28).
“While we expect CL to report strong Q3 results, lingering gross margin pressures (due to still-high underlying inflation and FX headwinds in building trading) have been balanced across geographic segments. Offset by strong organic growth (+7.5-+8%) for full-year 2022, offset by strong organic growth momentum, productivity building and gradual easing of Q4 input and logistics cost pressures As it functions, we expect limited change to full-year EPS despite increasing currency headwinds.
The analyst said, “In today’s economic climate, a fundamental improvement in oral care and strong momentum at Hill’s will further benefit from a consumer product portfolio leaning toward value, so CL’s continue to have a positive bias.”
To quantify these bullish comments, Powers has given CL an $85 price target, suggesting it could climb up to 20% next year. (To see Powers’ achievements, click here)
Overall, CL gets a medium buy rating from Wall Street analyst consensus, based on five buys and seven holds set in recent weeks. The stock is selling at $70.95, with an average price target of $78.67 suggesting up to 11% upside potential. (See TipRanks CL stock forecast)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly released tool that consolidates insights on all TipRanks stocks.
Disclaimer: The opinions expressed in this article are those of the featured analyst only. This content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
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