Dan Loeb's simple strategy destroys the market

Published Mon, Aug 3 201511:22 AM EDTUpdated Sat, Oct 14 201710:44 AM EDT

Dan Loeb , the acerbic activist hedge fund manager, crushed the market over the last 20 years and he's doing it again this year. Loeb's Third Point fund, which turned 20 this year, posted 21 percent annualized returns over that time span, compared with a 9 percent annualized return for the S & P 500, according to a letter sent to investors. It's up 4.9 percent this year. Loeb calculates that they've generated $12 billion in trading profits for clients over the years. "Of course, past performance is no guarantee of future results and it is unlikely we will duplicate these returns over the next 20 years. However, we believe we are well positioned to continue to earn our investors superior risk-adjusted returns," Loeb wrote in a note to clients Friday. While he's known for forcing change in the companies he owns by aggressively targeting management with bristling open letters, he revealed last week another strategy he uses to top the market that's surprisingly simple. "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 , " said Loeb , who oversees more than $17 billion. It's a strategy similar to the one deployed by Warren Buffett. Loeb calls it his "value compounder" method. Here are the three stocks that fit the criteria right now. 1) Constellation Brands : Loeb first bought shares of Constellation Brands in 2012 as an event-driven trade when the company bought the Mexican beer brands Corona and Modelo Especial. The idea evolved into a volume growth and margin improvement story. He believes the company will benefit from favorable Latino demographic trends and cost savings from manufacturing efficiencies. If the company hits its $7.50 earnings per share target for 2017, Loeb believes investors will bid up the stock much higher from its current level at 16 times earnings. 2) Mohawk Industries : Loeb invested in Mohawk in 2014. He thinks the flooring maker has only just begun on a cyclical recovery with many of its products still 30 percent below prior peak volumes. The company should also benefit from margin improvement from lower raw material prices and acquisitions. Read More Dalio letter: We messed up on China bubble 3) Roper Technologies : Loeb said Roper is one of the "best capital allocators" among industrial companies, and it should be able to provide 15 percent annual compounded returns for the foreseeable future. In the investor letter, Loeb also defended current activist techniques against attacks from politicians. He wrote that the "hit and run" method of activists cited by critics doesn't actually exist. Loeb went on to list sever