Dan Loeb’s Third Point LLC boasted Baxter International Inc (NYSE:BAX) as its biggest position at the end of 2016. And the fact that Loeb is putting his money to work on BAX stock as opposed to some bigger-name stock might surprise you.
Hedge fund managers are like the people you meet at the horse track. They are always looking for a big score.
Unlike horse players, however, hedge fund managers often do score, and they score big. It can pay small investors to follow in their wake, and there is a cottage industry of newsletters and touts which do just that.
Dan Loeb of Third Point is one of the players the touts follow most avidly. Loeb is personally worth $2.9 billion. Third Point made a cool $1 billion on Yahoo, and beat back Bill Ackman’s short on Herbalife Ltd. (NYSE:HLF). And, as a fun fact, Loeb compares investing to the HBO series Game of Thrones.
So, where is Dan Loeb putting money to work right now? The answer may surprise you.
Loeb’s Biggest Bet
Baxter is listed on stock sites as having a price earnings multiple of 5.44, but that’s misleading. It took a huge gain last year after Shire plc bought its drug spin-off Baxalta, at $45.32 per share.
Loeb, however, is betting more than 20% of his chips on the current Baxter, which looks (on the surface) like a slow-growing company specializing in products for dialysis and drug infusions. It had revenue of $10.163 billion in 2016 and usually brings about 10% of that to the net income line.
Most analysts who follow BAX stock consider it a hold and expect earnings of $2.16 per share this year.
That’s not exciting. So, what does Loeb see that others don’t?
Betting the Jockey
My guess is he’s betting the jockey, not the horse.
The jockey is CEO Jose Almeida, who took the helm at Baxter while the Shire sale was in process. So far, he has cut jobs and closed some facilities.
That’s not exciting, either, but Almeida came to Baxter from The Carlyle Group LP (NASDAQ:CG), where he served as an operating executive. Carlyle is a legend in the leveraged buyout business and has $193 billion of assets under management.
Before going to Carlyle, Almeira ran Covidien, another medical products company that is now part of Medtronic Plc. Medtronic bought Covidien for $42.9 billion in a deal that moved its own headquarters to Ireland for tax reasons. Covidien, a spin-off of Tyco International, made people a lot of money.
Obviously, Almedia knows how to do deals. He also knows how to dress up assets for deals. A deal like the one he did for Covidien may not have made sense a year ago, but now greed is good. It would likely go through without any problem.
Almedia already has profit up 19% for the quarter ended December and he gave an upbeat view on 2017 earnings. Since the start of the year, Baxter shares are up 11.23%, against a gain for the S&P 500 of just 3.85%.
How Can I Lose?
It is possible for you to lose on this.
Loeb got into Baxter back in late 2015 when BAX stock was trading around $40. If Almeida did a deal tomorrow at close to the stock’s current price, Loeb would be happy, but new buyers of Baxter stock would not be.
Trump has also made noises about cutting medical costs, and a Baxter tax inversion would not do that. There is a chance that the repeal of Obamacare could cut demand for what Baxter produces — people might die instead, which would be bad for Baxter’s business.
Loeb doesn’t win all the time. Neither does Almeira. But, if you want a tout, you go with a track record. The same is true if you’re looking for a good corporate jockey, and Almeira has a very good track record.
They’ve got a horse right here, and its name is Baxter. If you are looking to play, call your bookie, er…broker.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.