Billionaire Daniel Loeb Goes Bargain Hunting: 2 Stocks He Just Bought

Investors looking to beat the market could do worse than follow Daniel Loeb’s lead. The billionaire is the money manager for Third Point, the hedge fund he founded nearly thirty years ago. During that time, he turned $3.4 billion in seed money into a financial powerhouse with nearly $12 billion in assets under management.

Loeb has been called “one of the most successful hedge fund managers of his generation.” The Wall Street Journalgenerating average annualized returns of 16% over 28 years, outperforming returns S&P 500 by almost 6%.

The billionaire investor has long emphasized investing in “high-quality companies that trade at reasonable valuations,” but doesn’t lose sight of their “prospective growth.”

With that as a backdrop, let’s look at two stocks Loeb bought in the second quarter.

Image source: Getty Images.

1. Apple

Third Point’s largest new position in the second quarter by a fair margin was Apple (AAPL -0.34%). Loeb bought 1.95 million Apple shares worth about $411 million and representing nearly 5% of Third Point’s portfolio, making it his seventh largest holding.

Loeb addressed this purchase at length in Third Point’s shareholder letter, noting that he bought Apple stock in April. A quick look at the stock chart reveals that the stock was selling for 26 times earnings, down from a multiple of 27 for the S&P 500 at the time. Indeed, Loeb noted that Apple’s “relative multiple has compressed to a multi-year low,” thanks in part to “several years of stagnant growth.”

Compelling valuation aside, Loeb cited several factors that made Apple an intriguing choice, including the company’s ecosystem of 2.2 billion active devices and market leadership across multiple form factors in numerous key markets.

He also noted investors’ fears that Apple would be an “artificial intelligence (AI) loser,” but the billionaire came to a different conclusion. Loeb believes the upcoming release of Apple Intelligence — a suite of user features with generative AI — will drive “significant demand in Apple’s installed base.” He went on to postulate that “AI-related demand could lead to a gradual shift in improving Apple’s revenue and earnings over the next few years.”

I think Loeb’s thesis is correct. Apple’s revenue rose less than 1 percent in the first nine months of its 2024 fiscal year, after falling 3 percent in fiscal 2023 due to weak iPhone sales. However, inflation fell to 2.9% in July, marking the lowest rate in three years. Improving prices will give consumers more discretionary income. In addition, Apple announced the date for its annual iPhone unveiling, scheduled for September 9, when the company is expected to provide details for an AI-powered iPhone. This will undoubtedly spark demand among the Apple faithful, fueling a booming upgrade cycle for the iPhone 16.

2. Taiwan Semiconductor Manufacturing

Third Point has significantly increased its stake in Taiwan Semiconductor Manufacturing (TSM 1.51%)often referred to as TSMC, during the second quarter. Loeb bought another 850,000 shares of TSMC, increasing his total holdings to 2 million shares worth about $352 million and representing 4% of Third Point’s portfolio, making it the 10th largest.

Loeb has steadily increased Third Point’s stake in TSMC since taking office in May 2023. He noted that the company is coming off “the worst year since the global financial crisis,” making it a compelling opportunity. Loeb believes the combination of cyclical recovery and strong AI demand will drive “substantial earnings growth for the company.”

TSMC occupies a unique position in the industry, according to Loeb, with more than 90 percent market share for “high-end semiconductor manufacturing,” which includes chips used for AI. While AI currently represents a “relatively small percentage” of TSMC’s sales, he sees “TSMC’s AI revenue growing multiples in the coming years.”

I think Loeb hit the nail on the head. TSMC’s dominant market share of high-end processors makes it a favorite to benefit from these secular headwinds. Furthermore, after suffering declines of more than 3% last year, the smartphone market has rebounded in 2024, expected to reach growth of nearly 6%, according to data provided by market intelligence firm IDC. As one of the leading suppliers of smartphone chips, this return to growth will also boost TSMC’s results.

In the second quarter, TSMC’s revenue rose 40% year-over-year, while earnings per share rose 36%. Management expects its growth streak to continue, guiding for revenue growth of 34% in the third quarter. It’s worth noting that TSMC tends to issue conservative guidance, so the results could be better.

AI adoption continues to gain momentum and estimates of the final market size continue to grow. While estimates vary, the market for generative AI is expected to be worth between $2.6 trillion and $4.4 trillion annually over the next decade, according to global management consulting firm McKinsey & Company.

Economic recovery and AI adoption will provide more tailwinds to drive TSMC higher.