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Staples, Inc. (SPLS), Office Depot Inc (ODP) Down On Merger Fears: What Do Hedge Funds Think?

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Staples, Inc. (NASDAQ:SPLS) and Office Depot Inc (NYSE:ODP) are down over the past couple days over fears of potential problems regarding their planned merger. Within the last two days, Staples, Inc.’s stock has slid by 4.99%, while Office Depot Inc’s shares have declined by 2.74%. Fears about the two firms’ merger, which was confirmed to be in the works in February, were sparked by a recent decision of the U.S. District Court in the District of Columbia blocking Sysco Corp. (NYSE: SYY)’s proposed merger with US Foods, Inc, with the court granted approval to a request for preliminary injunction filed by the Federal Trade Commission. Industry observers, it seems, have been spooked by the decision, thinking that the Staples and Office Depot merger will run into similar antitrust concerns, especially since Office Depot acquired another business in the same industry, OfficeMax Inc., in 2013. Staples, Inc. (NASDAQ:SPLS) and Office Depot Inc (NYSE:ODP) shareholders appear to be hopeful, nonetheless, that the deal will go through, even if it is expected to face a hard path to approval. Office Depot shareholders are reported to have voted overwhelmingly in favor of the deal.

Staples, Inc. (SPLS), NASDAQ:SPLS, Office Depot Inc (ODP), NYSE:ODP, Yahoo Finance,

The best stock pickers in the world also appear to be supportive of both companies and positive about their merger potential. At the end of the first quarter, a total of 56 of the hedge funds tracked by Insider Monkey were long in Staples, Inc. (NASDAQ:SPLS), a change of 27% from the fourth quarter. Similarly, there was an increase in hedge fund ownership in Office Depot Inc (NYSE:ODP) during the same quarter, as a total of 46 of the hedge funds tracked by Insider Monkey were long in the stock, a change of 5% from one quarter earlier. In terms of total worth of holdings, in Staples the value of holdings increased to $1.82 billion in the first quarter from $1.68 billion in the prior quarter, a change of 8.67%. This is a significant increase since the stock price of Staples declined 10.13% during the first quarter. In Office Depot meanwhile, the total value of hedge fund’s holdings increased substantially as well, to $1.45 billion through the first quarter, from $1.03 billion at the end of 2014, a change of 41.16%. This is a large move as the stock climbed only 5.22% during the period.

Through our research, we discovered that a portfolio of the 15 most popular small-cap picks of hedge funds beat the S&P 500 Total Return Index by nearly a percentage point per month on average between 1999 and 2012. On the other hand, the most popular large-cap picks of hedge funds underperformed the same index by seven basis points per month during the same period. This is likely a surprise to many investors, who think of small-caps as risky, unpredictable stocks and put more faith in large-cap stocks. In forward tests since August 2012, these top small-cap stocks beat the market by an impressive 84 percentage points, returning over 144% (read the details here). Hence, a retail investor needs to isolate himself from the herd and take advantage of the best growth opportunities in the market by concentrating on small-cap stocks.

At Insider Monkey, we also track insider sentiment to estimate confidence of top management in their own companies. At Staples, Inc. (NASDAQ:SPLS), there have been no sales or purchases of stocks by insiders so far in 2015. At Office Depot Inc (NYSE:ODP), there were no purchases but some sales in June. At the start of the month, President for International Mark Steven Schmidt sold 210,000 shares in three transactions.

Keeping this in mind, let’s check out the fresh hedge fund action regarding Staples, Inc. (NASDAQ:SPLS) and Office Depot Inc (NYSE:ODP).

Hedge fund activity in Staples, Inc. (NASDAQ:SPLS) and Office Depot Inc (NYSE:ODP)

Richard S. Pzena
Richard S. Pzena
Pzena Investment Management

According to hedge fund intelligence website Insider Monkey, Richard S. Pzena‘s Pzena Investment Management had the number one position in Staples, Inc. (NASDAQ:SPLS), worth close to $372.3 million, comprising 2.1% of its total 13F portfolio. Sitting at the number two spot was Starboard Value LP, managed by Jeffrey Smith, which held a $231.7 million call position. The fund had 4.8% of its 13F portfolio invested in the position. Remaining hedgies that hold long positions comprise Cliff Asness’ AQR Capital Management, and Jim Simons’ Renaissance Technologies.

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