Daniel Loeb, CEO of Third Point, has a reputation for turning risk into success. His preferred strategy – of going in and cleaning up the mess – has built his firm into a $17 billion-plus asset management behemoth, with both hands in the US and international equity and credit securities markets.

In the current environment, as we’re getting buffeted about by epoch-making public health crises, economic disruptions, and now foreign policy political disasters, Loeb sees a combination of risk and volatility as the key factors.

"In Q2, market volatility increased materially with wild swings in sentiment and factors, which we expect to continue throughout Q3. The backdrop for risk assets remains constructive – financial conditions are loose, fund flows are healthy, savings rates are high, and policy is broadly supportive," Loeb wrote.

Loeb added, "While valuation always matters, our analysis is more focused today on business quality, differentiation, innovation, disruption and market structure. This contrasts with our previous focus as an event-driven fund on using 'events' (spinoffs, recaps, mergers, etc.) as opportunities to find 'cheap' stocks."

It’s an interesting background to keep in mind as we look at two of Loeb’s recent stock buys. According to the TipRanks database, these are Strong Buy choices, with unanimous approval from the Wall Street analyst corps. Let’s find out what else makes them so compelling.

Zimmer Biomet Holdings (ZBH)

We’ll start in the medical industry, where Zimmer Biomet, first established in 1927, is a med tech provider with a portfolio of digital and robotic technologies used in diagnostics, joint replacements, data gathering and analytics, and more. The company has rebounded quickly from the COVID-low of 2Q20, based on revenues and earnings.

In the most recent quarterly report, for 2Q21, the company showed $2.03 billion at the top line, well above the $1.86 billion average of the last 8 quarters. Revenue in Q2 was up 12.9% sequentially, and 69% year-over-year. EPS, which came in at 67 cents, was down 28% sequentially – but was up dramatically from the $1 per-share loss reported in the year-ago quarter. Revenue and EPS both came in above the analyst consensus for the quarter.

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Loeb was clearly impressed by Zimmer, as his firm took a new position in the stock – to the tune of 800,000 shares. This holding is worth over $116.36 million in current levels – hardly chump change, even for a $17 billion hedge.

Wall Street’s analysts have also been showing the stock some love. Among the bulls is Needham analyst Mike Matson who rates ZBH a Strong Buy along with a $202 price target. The analyst, therefore, expects the stock to climb ~40% over the coming months. (To watch Matson’s track record, click here)

“We believe that ZBH had been gaining recon share in recent quarters, so at this point we attribute the weaker 2Q21 results to market turbulence and variability by geography and product subcategory as opposed to a change in competitive dynamics. Management continues to believe the procedure volume backlog remains large but now expects this to take longer to work through. We still believe that ZBH can reach, and sustain, mid-single digit revenue growth and drive increased margin improvement,” Matson wrote.

Matson’s view on ZBH is hardly an outlier, as the stock has no fewer than 13 positive reviews set in recent weeks – for a Strong Buy analyst consensus. The shares have an average price target of $192.69 and trading price of $145.46, suggesting an upside of ~32% for the next 12 months. (See ZBH stock analysis on TipRanks)

AES Corporation (AES)

The second Loeb pick we’ll look at here is AES, a major generator and distributor of electrical power. This company, based in Arlington, Virginia, has a world-wide footprint, with power generation facilities and distribution in 15 countries. Electricity is a vital commodity, and even with the pandemic-induced recession last year, the company saw $9.66 billion in total revenues. Along with solid revenues, the company’s stock is up 38% in the last 12 months.

AES reported earnings in-line with estimates for 2Q21, at 4 cents per share. While low, this was up from the 22-cent per share net loss reported in Q1, and the 13-cent per share loss reported in the year-ago quarter. At the top line, revenue was reported at $2.7 billion, for a 21% yoy gain, and beating the estimates by over 11%.

Looking ahead to coming quarter, AES reported that it has retired 1.1 GW of coal-powered generation in Chile, and has contracted to replace that power with 2.3 GW was renewable energy. In addition, the company has signed 1.8 GW worth of new power purchase agreements. This puts the 2021 total of PPAs at 2.9 GW year-to-date. The company’s PPA backlog now stands at 8.5 GW. Finally, AES has received regulatory approval at its Ohio and Indiana utilities, a step that will allow progress on planned new investments worth over $2 billion – and will grow the company’s rate base by 9% annually into 2025.

AES pays out a dividend to shareholders, and while the yield is modest, at just 2.4%, the payment is reliable – and has a 9-year history of regular dividend increases.

And now we get to the interesting point: During the second-quarter, Loeb's Third Point saw fit to boost its holding in the stock by 49%. The fund bought 900,000 shares of AES, worth $21,888,000 at current prices. The purchase brings Third Point's stake in the company to 2,750,000 shares, valued over $66 million.

Wall Street is also upbeat about AES prospects. Evercore's 5-star analyst Durgesh Chopra reiterates his decision to make AES a ‘premier pick,’ writing: "We view AES as a leading renewable energy provider offering a unique battery storage solution in Fluence. Despite these elite attributes and industry high 7-9% EPS growth the stock as of todays close is trading at ~13x 23 earnings, at a material discount to US utility peers at ~18x and domestic/international renewable peers at ~25x. We continue to view the risk/reward as very attractive and see bull/bear valuation of $38/$23 respectively. AES remains our top diversified pick."

In line with these bullish comments, Chopra rates AES an Outperform (i.e. Buy), and his $30 price target indicates room for a 23% upside in the coming months. (To watch Chopra’s track record, click here)

Overall, it’s clear that Wall Street agrees with this bullish outlook. This stock has 6 positive reviews, for a unanimous Strong Buy consensus rating. The shares are trading for $24.32 and their $30.33 average price target implies ~25% upside from that level. (See AES stock analysis on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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