Dan Loeb is bullish on artificial intelligence — who isn’t? — and energy transmission. In his first-quarter client letter, dated April 30, the hedge fund manager highlights his case for several stocks in these sectors.
AI is “a key element of the thesis for nearly half our positions today,” Loeb states in the letter, seen by Institutional Investor. “We also see the energy transmission and growth in data centers affecting scores of industrial materials and energy companies as demand for infrastructure and certain commodities surges.”
In the energy transmission category, for example, Loeb singles out Vistra, one of the largest independent power producers and retail electric providers in the country. Last year, its nuclear, natural gas, and coal operations produced 20 percent of Texas’s power, he says. Loeb notes that Vistra operates in unregulated markets so it can generate and sell electricity at market prices. He calls the company’s capital allocation strategy “brilliant.”
Since Third Point made its investment, Loeb says, the market has started focusing on two trends that benefit Vistra: increased penetration of intermittent generation (renewables) and an “inflection in power demand” from AI/data centers and electric vehicles.
As for AI, Loeb believes the big beneficiaries will be what he describes as incumbents “deploying their financial and intellectual war chests” to win the arms race. He says two “legacy” companies he owns — Microsoft and Amazon — have built enormous competitive advantages.
In the letter, Loeb also discusses London Stock Exchange Group, Alphabet, and Taiwan Semiconductor Manufacturing.
Loeb calls LSEG “a mission-critical capital markets data provider” that will be a beneficiary of generative AI adoption in financial services. “LSEG is the number one real-time data provider in capital markets with the greatest data depth, breadth, and history,” the hedge fund manager asserts. He adds that the company is the only scale vendor working with Microsoft to democratize access to financial data and embed it directly in Office365 “at a much lower cost than alternatives,” and is about to produce applications that automate simple tasks previously performed by users.
As II previously reported, in the first quarter Third Point took a huge position in Alphabet, Google’s parent. Loeb says it is a big AI play, noting that it has “both a substantial distribution and technology advantage over competitors” and is positioned to use its AI capabilities to unify, enhance, and better monetize its entire suite of products.
Loeb says he added to his stake in Taiwan Semiconductor in the first quarter after initiating the position last May. He points out that the company is coming off its worst year since the Global Financial Crisis, but going forward, he sees “a combination of cyclical recovery plus structural growth in AI demand fueling substantial earnings growth.” He calls it the “toll road” for the semiconductor industry. The company has a 90 percent market share of leading-edge semiconductor manufacturing, Loeb notes.
The fifth stock he highlights is not an AI or energy company, but rather a Third Point activist target: Advance Auto Parts, which operates in the auto aftermarket. Third Point initiated its position in fourth-quarter 2023 after the company continued to underperform its peers in what Loeb deems an attractive industry. He points out that following engagement with Third Point, Advance Auto added three new directors. Loeb says the long-term opportunity is in fixing the core retail business. At the same time, he says, the upcoming sale of the company’s Worldpac auto parts business is a near-term catalyst that “should unlock significant shareholder value.”
