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Consider investing with the big guys – Short Case Study of Dan Loeb’s investment in Nestle

Third Point, the $18 billion hedge fund, run by billionaire investor Daniel Loeb invested more than $3 billion in Nestle in late Q2 2018 when Nestle’s share price languished between 75 and 85 CHF.

Immediately after having built the stake, Dan Loeb stepped up pressure on the world’s largest food group through a letter that urged its board to be “sharper, bolder and faster”. Specifically, Loeb recommended spinning off businesses and untangling the complex management structure asking for drastic change: “This is a call for urgency – rather than incrementalism.” In addition, to the letter Loeb put forward a 34-page presentation with recommendations and critiques and launched a website http://www.nestlenow.com.

Patience paid off

Nestle shares took some months to react but have been rising throughout all of 2019 so far creating an estimated gain of 40% on Third Point’s position, equivalent to a pre-tax gain of roughly $ 1.2bn.

Without going into much detail, we wanted to highlight this case, which is one of many where private investors can hitch a ride with a top notch professional investor. This is why we have created a number of Ziggma model portfolios comprising the top holdings of some of the best investors in the business, such as Dan Loeb, Warren Buffet, Nelson Peltz or Paul Singer of Elliott Advisors.

Pay attention to the entry point

Clearly, all bets by star investors clearly do not work out. In some instances, the news of the investor taking a big stake by itself may cause the stock price to spike by 10% or more so that the private investor’s entry point will be well above the price that the Star Investor paid for his stake.

Having said that, in the large majority of cases you can be sure of the following things, if you decide to “co-invest”:

  1. The star investor will look to minimize downside risk, i.e. he selects companies with strong business models, high barriers to entry and very well-known brands (some other examples of Third Point’s activist campaigns are Sotheby’s, Yahoo, DOW Chemical and United Technologies). So, the upside that the star investor looks to realize from the company can be generated of a sound foundation.
  2. The star investor will have done his stock research and then some.
  3. Large, successful investors work with ample resources and have teams comprising some of the most brilliant minds in analytics or the legal domain.
  4. The star investor will employ every angle possible to get his way.