Activist Jeff Smith’s Five Favorite Stock Picks

#3 Advance Auto Parts, Inc. (NYSE:AAP)

Shares held (as of March 31): 1.71 million

Total Value (as of March 31): $273.76 million

Percent of Portfolio (as of March 31): 9.62%

Although Starboard kept its stake in Advance Auto Parts unchanged at 1.7 million shares, the position accounted for 9.62% of the fund’s portfolio, worth $273.8 million at the end of March. Starboard has a big position in the stock because the fund believes Advance Auto Parts, Inc. (NYSE:AAP) is substantially undervalued due to the fact that it isn’t run as well as it should. Starboard notes that similar competitors Autozone, Inc. (NYSE:AZO) and O’Reilly Automotive Inc (NASDAQ:ORLY) have operating margins of around 20% while Advance Auto Parts has operating margins of 10-12%. The fund believes Advance Auto Parts’ operating margins could be just as high as its competitors if management’s execution improves, non-core assets are monetized, and some working capital comes out of the business. In early April, Advance Auto Parts took a big step to improve its management structure by naming Thomas Greco as CEO. Mr. Greco was previously the CEO of Frito-Lay North America. Investors hope Greco can lift Advance Auto Parts, Inc. (NYSE:AAP)’s operating margins closer to its peers.

#2 Darden Restaurants, Inc. (NYSE:DRI)

Shares held (as of March 31): 6.62 million

Total Value (as of March 31): $438.58 million

Percent of Portfolio (as of March 31): 15.42%

Starboard took profits in Darden Restaurants, Inc. (NYSE:DRI) in the first quarter after successfully unlocking value in the stock. The fund cut its stake by 44% to 6.62 million shares, worth $438.6 million at the end of March. Although the fund reduced its exposure to the company, Darden nevertheless accounted for 15.41% of Starboard’s equity portfolio at the time. On the account of the strong economy and low fuel prices, Darden shares have performed reasonably well, up by 5.5% year-to-date. The company reported fiscal third quarter earnings that beat both top- and bottom-line estimates, and still trades for a cheap 16.6 times forward earnings. The stock also pays an attractive 3% dividend yield. Given the attractive dividend yield, the strong economy, and the cheap forward P/E, many funds still think Darden has considerable upside left.

#1 Yahoo! Inc. (NASDAQ:YHOO)

Shares held (as of March 31): 12.3 million

Total Value (as of March 31): $452.71 million

Percent of Portfolio (as of March 31): 15.91%

Given the quality of its assets and the poor performance of its operations, it’s not surprising that Yahoo is Starboard’s top holding. According to the latest SEC filings, Starboard raised its stake in Yahoo by 74% to 12.3 million shares, worth $452.7 million at the end of March. The over $450 million position accounted for 15.9% of Starboard’s portfolio. Partly on Starboard’s behest, Yahoo! Inc. (NASDAQ:YHOO) is considering selling its core operations to various companies while keeping its Alibaba Group Holding Ltd (NYSE:BABA) stake. Analysts estimate the sale could bring in as much as $4-$8 billion. If the final realized number is higher than market expectations and management decides to use the money to buy back stock, Yahoo shares might rally. Whatever happens, Starboard will likely play a part in the final decision process. Starboard will have four directors on Yahoo’s board in the near future.

Disclosure:None