Analyzing Loeb's Top 3 Picks for 2013
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Dan Loeb is well known for writing harsh public letters to the CEOs in regards to the performance and conduct of the company. In 2012, with one of his letters he was successful in removing Yahoo's former CEO Scott Thompson and himself became member of the Yahoo Board holding a huge stake in the company with 73,000,400 shares. In this article, I am trying to analyze three top holdings on his portfolio and how they should perform in 2013.
Yahoo has seen many ups and down in the last several quarters, be it the decline in its core business where traffic was down 24% (search) and 12% (mail) in December 2012 as compared to 2011 or the controversies related to its management. But, despite these fluctuations, I remain confident about Yahoo's growth story with the Alibaba IPO valuation, which is anticipated to be $60 billion. Yahoo reported $3.1 billion of net income in 3Q12 by selling a part of its stake in the Alibaba Group, one of the most valuable internet companies with a valuation of $35 billion. Yahoo announced that it will be selling just one half of the remaining stake at the time of Alibaba's IPO. Also, the company will be selling its stake in Yahoo Japan and 50% of the proceeds generated with it will be used for buybacks.
The company remains committed towards its share repurchase and has announced its intention to repurchase $3.6 billion of shares in 2013 from the proceedings generated by selling its stake in the Alibaba Group. On the other hand, mobile is still a challenge for Yahoo with no material mobile advertising till now, and the urgent need to monetize its mobile subscriber base. For this the company is making efforts to be a leader in the mobile business by 2015 and as part of its efforts in this direction launched a new application Flicker for the iPhone to compete with Instagram.
American International Group
2013 seems to be a capital management story for AIG. The company recently sold its remaining 13.7% stake in AIA thus generating $6.5 billion in proceeds. AIG has been focusing on selling its non-core assets and generating capital in order to meet its general corporate purposes and moreover to make a repayment to the US government. Since 2010 the company has been slowly reducing its stake in AIA. Before this transaction, the company sold its 90% stake in International Lease Finance Corporation (ILFC) for $4.7 billion to Chinese investors considering it a non-core asset. Moving forward this capital management will continue till 2015 involving $12 billion to $17 billion.
AIG also has huge capital in order to make buybacks which is estimated to be more than ~$ 3.1 billion from 2013 to 2015. The robust capital deployment over the coming years will drive in $4 billion to $5 billion in excess capital generation. It is expected that the company will be having $18.9 billion in capital at the end of 2013 and $29.3 billion of capital deployment from 2012 to 2015. AIG has been successful in shedding its risky business at an impressive valuation resulting in improvements in its financial leverage and also reduction in its interest expense load.
AT&T recently announced that it sold a record breaking 10 million smartphones in 4Q12, which is up 6.6% y/y. And it is accepted that it was because of the higher mix of iPhones as it sold more than 8.1 million of the iPhone in the quarter. On the other hand Verizon also revealed that more than half of its activations were made by iPhone in the last quarter. This tremendous performance of Apple with the combination of its brand innovation makes the future outlook for the company very positive. iPhone remains the bread and butter for Apple as it generates 50% of its profit from this segment only and also captures 50% of the US market share.
Also, as per the RBC analyst the company's sales are likely to be up 25% in 2013. However, the bears might feel that now the company is not as innovative as it was during the Steve Jobs era, I am still bullish on Apple. Though the company needs to bring out a lower priced device such as Samsung’s in order to maintain its leadership in the market as Apple is only within the reach of higher class customers. But for me Apple has always been a growth story and it cannot be underestimated that time and again the company has made a killer come back with a new product line.
To conclude, I feel that the above discussed stocks provide a good opportunity for making long term investments which are backed by their strong fundamentals.
madhudube has no position in any stocks mentioned. The Motley Fool recommends American International Group and Apple. The Motley Fool owns shares of American International Group and Apple and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!