Billionaire Barry Rosenstein’s Top Moves Ahead of 2016

Following activist investors like Barry Rosenstein is one of the best ways to benefit from imitating the moves of smart money investors, mainly because activists usually don’t wait for a stock to appreciate over the long-term, but create catalysts that push towards unlocking shareholder value. This is why in the last years, activists have generated stronger returns than their passive peers. Specifically, billionaire Barry Rosenstein’s JANA Partners has posted an annualized return of 12% since its inception in 2001, even though it inched down in the first nine months of 2015, affected by the overall market decline. Since JANA Partners has recently revealed its equity portfolio for the end of the fourth quarter of 2015, we decided to take a look at some of the moves made by Mr. Rosenstein between October and December that caught our attention.

We follow JANA Partners as part of our small-cap strategy, which involves imitating the top small-cap stocks that hedge funds are collectively bullish on. This approach can help a retail investor generate substantial returns over the long-run, as proven in our backtests (read more details here). According to our own analysis, JANA’s 25 holdings in companies with a market cap above $1.0 billion posted a nearly flat return in 2015, which is not impressive, but is still in the upper half of our ranking that includes over 700 hedge funds.

Let’s start with JANA Partners’ largest holding in terms of value, which is represented by ConAgra Foods Inc (NYSE:CAG), in which JANA cut its position by 1.94 million shares, disclosing a holding of 28.63 million shares worth $1.21 billion. The move comes amid a 15% growth registered by the stock between October and December. Last year, JANA Partners reached an agreement with ConAgra which included the appointment of two directors to the company’s Board. In addition, the packaged foods company agreed to cut costs and sell its private brands. In November, TreeHouse Foods Inc. (NYSE:THS) agreed to buy ConAgra’s private brands in a $2.7 billion deal, which includes 32 plants in the U.S, Canada and Italy, with the Battle Creek plant having been acquired earlier this month. In its latest investor letter, JANA said that a sale of the private-label business will allow the company to obtain substantial cash proceeds and will “pave the way for further asset dispositions”. Billionaires Ken Griffin of Citadel Investment Group and Israel Englander of Millennium Management also own shares of ConAgra Foods, reporting ownership of 5.57 million shares and 5.18 million shares respectively in their latest 13F filings.

Next in line is Microsoft Corporation (NASDAQ:MSFT), in which JANA further increased its position, which was initiated during the third quarter. As the stock climbed by 25% in the second half of 2015, JANA amassed a $550.60 million position, which contained 9.92 million shares at the end of 2015, up from 7.70 million shares disclosed as of the end of September. Year-to-date the stock is down by nearly 8%, although the decline was offset by strong results for the last quarter, which were reported by Microsoft Corporation (NASDAQ:MSFT) at the end of January. The company delivered EPS of $0.78 on revenue of $25.69 billion in the second quarter of fiscal year 2016, which was above the consensus estimates of $0.71 in EPS and revenue of $25.26 billion. The results also showed that amid a declining PC market, Microsoft Corporation (NASDAQ:MSFT) is moving away from relying on Windows, with Office 365 revenue jumping by 70% on the year, while Azure revenue surged by 140%.

After it initiated a stake, JANA said in its third-quarter investor letter that Microsoft has “multiple avenues” to increase its earnings and free cash flow over the next couple of years. JANA also expects Microsoft to return more capital to shareholders and that its focus on cloud and the transformation of the company’s business model is also an advantage for both customers and shareholders. Billionaire Jeff Ubben’s ValueAct Capital unloaded 18.65 million shares of Microsoft during the fourth quarter, reporting a stake of 56.62 million shares in its 13F filing for the end of December.

On the next page, we are going to discuss JANA’s stake in QUALCOMM, Inc. (NASDAQ:QCOM), as well as two new positions the fund initiated during the fourth quarter.

QUALCOMM, Inc. (NASDAQ:QCOM) was JANA’s largest holding at the end of September, but the investor dumped around 19.34 million shares during the fourth quarter, cutting the position to 9.21 million shares valued at $460.47 million. Last year, JANA pushed for a Strategic Realignment Plan and in its third-quarter investor letter, said that the plan was being implemented by Qualcomm’s management and had the potential to increase returns. In addition, JANA said that QUALCOMM, Inc. (NASDAQ:QCOM)’s stock was undervalued, but it might have changed its thesis after the stock lost some 7% in the last three months of 2015 and has declined by another 7% since the beginning of 2016. Over the last 52 weeks, the stock is down by 34% and it currently sports a dividend yield of almost 4%, while trading at 9.5-times forward earnings, which makes the stock look cheap at current levels. Yesterday, Sanford C. Bernstein analyst Stacy Rasgon upgraded the stock to ‘Outperform’ from ‘Market Perform’, saying that the decline had pushed QUALCOMM, Inc. (NASDAQ:QCOM)’s stock towards a more attractive risk/reward profile. The analyst also raised the firm’s price target on the stock to $55.00 from $50.00. David Blood and Al Gore’s Generation Investment Management reported holding 13.25 million shares of Qualcomm in its latest 13F filing.

Finally, let’s take a look at two new positions that JANA initiated during the fourth quarter. One of them is a $295.97 million stake in Pfizer Inc. (NYSE:PFE), which contains 9.17 million shares. The move was made amid Pfizer Inc. (NYSE:PFE)’s acquisition of Allergan plc Ordinary Shares (NYSE:AGN), in which JANA cut its holding by 38% during the quarter, to 1.16 million shares. The merger deal, worth $160 billion, would create the largest drugmaker and would allow Pfizer to move its headquarters to Ireland, which would allow the company to slash its tax costs. At the same time, the transaction would increase Pfizer Inc. (NYSE:PFE)’s portfolio of branded drugs and could represent good ground for activists to push for the sale of the company’s segment that faces competition from generic drug makers, a move that Pfizer said it would delay for a couple of years. Billionaire Ken Fisher’s Fisher Asset Management owns 32.33 million shares of Pfizer as of the end of December.

Another new stake in JANA’s portfolio is represented by American International Group Inc (NYSE:AIG), in which the fund reported ownership of 4.25 million shares valued at $263.61 million. Even though JANA has not disclosed any plans related to activist involvement, Barry Rosenstein is now at least the third well-known activist among AIG’s shareholders, the other two being Carl Icahn and John Paulson. Earlier this year, Icahn and Paulson reached an agreement with American International Group to appoint two nominees to the board, one of whom is Paulson himself. In October, Icahn wrote a letter to American International Group Inc (NYSE:AIG) pushing for a split into three companies. In November, Icahn issued a statement in which he said that he had conducted several discussions with AIG’s President and CEO Peter D. Hancock, but added that his call for a separation was not taken seriously. JANA’s move might put more pressure on the company in the event that Rosenstein shares the same view about AIG as being “too big to succeed,” as Icahn put it. During the fourth quarter, Icahn’s Icahn Capital raised its stake in American International Group Inc (NYSE:AIG) by 40.88 million shares to 42.24 million shares, while John Paulson’s Paulson & Co. unloaded 3.0 million AIG shares, disclosing a holding of 11.60 million shares in its latest 13F.

Disclosure: None