NEW YORK (TheStreet) -- In investing, you can learn a lot by paying attention to the greats, and it's hard to argue with the numbers Daniel Loeb, founder of the Third Point LLC hedge fund, has put up.
Third Point marked its 20th year on June 1: Over that time, it has posted annualized returns of 21%, vs. 9% for the S&P 500, CNBC reported, citing a letter Third Point sent to its investors.
Besides strong returns, Loeb is famous for calling out management teams he thinks are falling short when it comes to increasing shareholder value. His solution: push for board seats in the companies he invests in, and usually a new face in the CEO's office, too.
But activism is only one tool in Loeb's toolbox. According to CNBC, Loeb recently revealed the following strategy, and it could have come straight from another superstar stockpicker, Berkshire Hathaway's (BRK.A - Get Report) (BRK.B - Get Report) Warren Buffett:
"Over the past few years, we have found investment opportunities in several companies that share simple, common characteristics: talented management teams, strong and growing free cash flows and a proven track record of smart capital allocation that drives significant increases of intrinsic value per share."
Follwoing is an up-close look at two companies Loeb has been buying recently, based on Third Point's latest filings with the Securities and Exchange Commision.
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Joining the Board at Baxter
Third Point revealed a 7% stake in Baxter International (BAX - Get Report) on Aug. 5, making it the medical device maker's largest single investor. According to a Sept. 30 SEC filing, the fund has since bumped that up to 9.9%.
Loeb has taken a softer approach to Baxter than with many of his earlier investments. In an Aug. 5 letter to director Thomas Stallkamp and retiring CEO Robert Parkinson, Loeb praised the firm for spinning off pharmaceutical subsidiary Baxalta (BXLT in June, writing that the move "required immense focus and detailed execution" and "effectively streamlined operations."
He also lauded the company for kicking off a process to replace Parkinson. "We look forward to bringing our experience to the Board and helping to select a new CEO," Loeb wrote. "We believe there are several external candidates with the requisite industry experience, leadership skills and track record of creating shareholder value who could ably take the reins at Baxter."
Baxter, for its part, granted Loeb's request for two seats on the company's board on Sept. 30.
Still, Baxter has lagged its peers in some key areas. According to Bloomberg, for example, the company's operating margin has averaged 14% over the past four quarters, compared to 18% for Becton Dickinson (BDX - Get Report) and 25% for C.R. Bard (BCR .
These three companies' stock performance tells a similar story: Over the past five years, Baxter has risen 23% (split-adjusted), while Becton is up 80% and Bard has gained 125%.
Loeb clearly sees a postspinoff Baxter as well placed to turn these numbers around. The firm continues to invest in new products, devoting 10.0% of its sales to research and development in the quarter ended June 30, up from 7.8% a year earlier. Baxter expects to get 10% of its sales from products currently in development by 2020 and 25% by 2025.
Meantime, the company stands to gain from one of society's surest trends: an aging population. In 2018, average global life expectancy will hit 73.7 years, up from 72.7 in 2013, according to Deloitte.
Mohawk Industries: No Activism Required
Third Point first invested in Georgia-based flooring maker Mohawk Industries (MHK - Get Report) in the fourth quarter of 2014, during which the stock averaged around $145 a share. He then boosted his stake by 180% in the first quarter of 2015 and hiked it again -- this time by 31% -- in the second quarter of this year, the latest quarter for which we have a full snapshot of Third Point's holdings.
As of June 30, Mohawk was the fifth-largest holding in Third Point's long portfolio, at 4.3%.
So far, it's been a good bet: The stock has shaken off whipsawing markets and risen from around $155 at the start of this year to its current level around $194. Last week, Goldman Sachs initiated coverage on Mohawk with a buy rating and a $232 price target, suggesting 20% upside from here.
Mohawk also stands out for another reason: Third Point hasn't pushed for a change in leadership at the company.
Quite the contrary: In Third Point's second-quarter shareholder letter, Loeb called Mohawk "exceptionally well managed" and said the CEO, Jeff Lorderbaum, "has created a culture and a system of processes that allows Mohawk to gain scale by empowering local managers to pursue acquisitions and capacity expansions. This system has enabled Mohawk to remain entrepreneurial, nimble and adaptable to change, even as it has grown significantly in size."
Loeb also praised Lorderbaum for being the company's largest single investor (high insider ownership is another quality Loeb likes to see in a stock).
In its fiscal 2015 second quarter, the company posted adjusted earnings of $2.69 a share, up 22% from a year earlier and ahead of the consensus forecast of $2.61. Sales were flat at $2.0 billion (or up 7.0% on a constant-currency basis) from a year earlier. (Thirty percent of Mohawk's sales came from outside the U.S. in fiscal 2014, so it's affected by the strong greenback).
Mohawk's adjusted operating margin improved by 240 basis points, to 14%, thanks to new products, better efficiency and higher sales volumes.
The company should also benefit from the Federal Reserve's decision to hold off on interest rate hikes, which will continue to support the housing recovery.
That, in turn, will help boost renovation spending, which is poised to rise to 4.0% year over year in the first quarter of next year, according to to a recent estimate from Harvard University's Joint Center for Housing Studies. That's an increase from the from 3.5% year-over-year growth the same center was predicting for the third quarter of 2015, according to MarketWatch.
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