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Billionaire Bill Ackman Buys More Valeant Shares, Starboard Value Gradually Jettisons Darden Restaurants Inc. (DRI) Stake and Two Other Moves

Hedge fund vehicles had a rough 2015, and the beginning of 2016 does not look too great either. The capital-weighted HFRI Fund Weighted Composite Index lost 0.85% last year, which marked the fourth negative year since 1990. According to Hedge Fund Research, the hedge fund industry as a whole lost 3.66% in January 2016, but the year is far from over. The recent broader market sell-off has punished both strong and weak companies, while smart money investors’ ability to identify real bargains might enable the struggling industry to finally beat benchmarks. With this in mind, this article will digest four filings submitted with the U.S. Securities and Exchange Commission by funds led by billionaires Jeffrey Smith, Bill Ackman, Mark Rachesky, and David Abrams.

Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).

Let’s begin our discussion with the 13D filed by Starboard Value LP, which reveals that Jeffrey Smith’s investment firm currently holds 9.32 million shares of Darden Restaurants Inc. (NYSE:DRI). This compares with the 10.34 million-share stake revealed through Starboard’s previous 13D filing on the company, discussed by Insider Monkey in mid-January (read more details). The freshly-upped stake accounts for 7.3% of the company’s outstanding common stock. Most importantly, the activist investment firm has undertaken a trading plan to gradually offload its position in Darden as part of a rebalancing process, citing significant appreciation of Darden’s share price.

The shares of the operator of full-service dining restaurants on the North American continent had indeed achieved strong price appreciation through mid-August 2015, but the stock has struggled to impress investors since then. The stock has lost more than 7% so far in 2016 and is down nearly 2% over the past 12-month period. Darden Restaurants Inc. (NYSE:DRI) generated sales from continuing operations of $3.30 billion for the first six months of fiscal 2016 that ended November 29, up from $3.15 billion reported for the same period of fiscal 2015. The increase in sales was mainly attributable to new company-owned restaurants and same-restaurant sales growth of 2.5%.

The company’s management anticipates that Darden will reach same-restaurant sales growth in the range of 2.5% to 3% in fiscal 2016, and open roughly 18 to 22 new restaurants. In the meantime, the stock trades at a forward price-to-earnings multiple of 15.54, which is substantially lower than the average of 24.0 for the restaurant industry. Therefore, what Starboard Value calls optimal level for unloading shares, others might consider attractive entry point. For instance, Jim Simons’ Renaissance Technologies found Darden Restaurants Inc. (NYSE:DRI)’s stock attractive during the third quarter and acquired a 690,000-share stake.

Matthew Halbower
Matthew Halbower
Pentwater Capital Management

The next two pages of this article will discuss the other filings submitted by the aforementioned smart money investors.

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