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Activist Alert: Is ConAgra Foods Inc. (CAG) A Good Stock To Buy Right Now?

Is ConAgra Foods, Inc. (NYSE:CAG) a good stock to buy right now? Activist investor Barry Rosenstein’s Jana Partners revealed a 7.3% stake in the company earlier today. Jana Partners purchased nearly 31 million shares equivalent for a total sum of $540 million. The total amount is lower than what you’d expect because Jana had gained exposure to 19 million shares (out of 31 million shares) via call options. Here is how Rosenstein explained the reasons behind this bold bet:

“The Reporting Persons acquired the Shares because they believe the Shares are undervalued and represent an attractive investment opportunity.  JANA believes that the Issuer has significantly underperformed in shareholder value creation.  Most significantly, the acquisition of Ralcorp Inc. in January 2013, which in JANA’s opinion was the most significant recent strategic decision made by the Issuer’s Board of Directors (the “Board”), has been followed by disappointing performance for shareholders, repeated guidance misses, negative revisions to long term earnings targets, no dividend per share growth, and operating performance challenges. Issues with this acquisition led to the Issuer taking a $1.3 billion impairment on March 26, 2015, after which JANA began purchasing the Shares and analyzing opportunities for improved shareholder value creation.  JANA believes that in the period since the Ralcorp acquisition, the Board has failed to adequately address the shareholder value destruction and persistent underperformance that followed the Ralcorp acquisition.

Barry Rosenstein
Barry Rosenstein
JANA Partners

JANA is prepared, if necessary, to nominate Messrs. Alford, Lawrence and Rosenstein (collectively, the “Potential Nominees”) for election to the Issuer’s board of directors and to participate in the solicitation of proxies in support of the Potential Nominees.  JANA  believes that the Potential Nominees possess the necessary expertise, experience and focus on shareholder value to help the Board evaluate and address opportunities for shareholder value creation, including but not limited to:  undertaking a strategic review of the Issuer’s strategy and corporate structure to determine if its businesses are optimally positioned to succeed, as well as various potential alternative transactions and structures; addressing the Issuer’s operational performance and cost structure; and optimizing the Issuer’s capital allocation policies and capital structure. JANA has requested, however, that the Issuer delay the June 21, 2015, deadline to submit notice of stockholder nominations for the Issuer’s 2015 annual meeting of stockholders (the “Annual Meeting”) in order to give the Issuer and JANA more time to have collaborative discussions regarding the steps JANA believes the Issuer should take to maximize shareholder value, as well as why JANA believes stockholders would benefit from the addition of the Potential Nominees to the Board. “

Barry Rosenstein JANA PARTNERS

ConAgra Foods Inc shares jumped 6% in after hours trading. Overall hedge funds were bearish on ConAgra during the first quarter. According to the latest round of 13F filings the number of long hedge fund positions in ConAgra were cut by 4 during the first quarter.CAG was in 23 hedge funds’ portfolio at the end of the first quarter of 2015. There were 27 hedge funds in our database with CAG positions at the end of the previous quarter.

Hedge funds have been underperforming the market for a very long time. However, this was mainly because of the huge fees that hedge funds charge as well as the poor performance of their short books. Hedge funds’ long positions performed actually better than the market. Small-cap stocks, activist targets, and spin offs were among the bright spots in hedge funds’ portfolios. For instance, the 15 most popular small-cap stocks among hedge funds outperformed the market by more than 84 percentage points since the end of August 2012 (read the details here). This strategy also managed to beat the market by double digits annually in our back tests covering the 1999-2012 period.

Keeping this in mind, we’re going to review the latest action encompassing ConAgra Foods, Inc. (NYSE:CAG).

How are hedge funds trading ConAgra Foods, Inc. (NYSE:CAG)?

At the end of the first quarter, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -15% from the fourth quarter. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their holdings considerably.

According to our database, Phill Gross and Robert Atchinson’s Adage Capital Management had the biggest position in ConAgra Foods, Inc. (NYSE:CAG), worth close to $141 million, corresponding to 0.3% of its total 13F portfolio. The second largest stake is held by Ken Griffin of Citadel Investment Group, with a $128 million position; 0.1% of its 13F portfolio is allocated to the company. Remaining peers that are bullish contain Joel Greenblatt’s Gotham Asset Management, Joe Huber’s Huber Capital Management and Anand Parekh’s Alyeska Investment Group. Jana Partners didn’t start buying ConAgra shares before the end of the first quarter.

There were a few hedge funds that sold out their stakes during the first quarter. It’s worth mentioning that Jacob Doft’s Highline Capital Management dumped the largest stake of the “upper crust” of funds watched by Insider Monkey, totaling close to $73.4 million in stock. Benjamin A. Smith’s fund, Laurion Capital Management, also sold off its stock, about $46.4 million worth.

We like imitating activists’ stock moves and Jana Partners is among the best activists in this field. Their involvement will bring in more hedge funds into ConAgra in the next few days. This is definitely a big positive signal. That’s why we think ConAgra is a good stock to buy right now.

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