Dan Loeb's Third Point Talks Yum! Brands, Devon Energy

In his first quarter investment letter, Third Point's Dan Loeb notes that the hedge fund has taken large stakes in two companies: Devon Energy Corp DVN and Yum! Brands, Inc. YUM. Yum! Brands moved sharply higher Friday following the announcement, gaining nearly 7 percent to $91.90. Devon Energy gained 0.6 percent to $68.61.

Loeb said that he remains constructive on U.S. equities for three main reasons. First, he forecasted that economic data will improve in coming quarters. Second, the Federal Reserve, in Loeb's view, is in no rush to raise interest rates in June or September, leaving accommodative monetary policy in place for longer. And finally – in a related point – Loeb argued that when the Fed does begin to increase rates, the path higher will be "gradual."

Specific to Yum! And Devon, however, Loeb said that the two companies are significantly undervalued by the market. With Yum!, Loeb said that the Chinese growth is in the midst of a turnaround, which "should neutralize the largest overhang on the stock" and "set the stage for a dramatic profit recovery over the next 12-24 months." Ultimately, that turnaround will "change" the market narrative around Yum!'s long-term value.

Loeb cited some Third Point research that indicated that Chinese consumers are not completely turned off of Yum!'s two food safety incidents. He said that the KFC brand resonates "strongly" with local consumers. Further, Loeb applauded management for their reaction to the incidents, noting that the most-recent earnings report showed "sequential improvement" for the first time since the second incident.

Outside of China, Loeb likes Yum! also. He said that the company has strong cash flows inside the high franchise restaurant system, alongside the ability to grow both units and same-store sales. In sum, Loeb argued that investors should own Yum! for its "unique open-ended middle-class growth story in China" and its "strong and growing franchise led cash flows outside China."

On Devon Energy, Loeb said that the company "stands out" in the exploration and production (E&P) space. The stock combines "limited downside with an underappreciated, valuable asset base that can be unlocked," according to the letter. Loeb tacked a number on to the market's underappreciation: $10-15 billion, or $25-35 per share.

Like Yum! Brands, Loeb expressed support for Devon's management, saying that the company's leadership will focus its capital on fewer, high-return areas. That will allow it to show the market "positive production surprises."

While Loeb said that there is "more to be done" to unlock the company's "full value," he praised numerous "strategic moves" over the past five years. Loeb suggested that the company streamline its focus on "top tier US assets in Permian Basin, Eagleford, and Cana-Woodford" to increase the company's ROI.

Year-to-date, both companies are outperforming the S&P 500 by large margins. Devon Energy has gained 12 percent since January, while Yum! gained more than 26 percent. The S&P 500 has added just 2.4 percent.