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.

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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.

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

Billionaire Bill Ackman is not giving up on Valeant Pharmaceuticals Intl Inc. (NYSE:VRX) just yet. According to a Schedule 13D filing, Pershing Square currently owns 30.71 million shares of the specialty pharmaceutical and medical device company, which constitute 9.0% of its total outstanding shares. This denotes an increase of 1.62 million shares from the position disclosed through a 13D filing submitted at the end of December. Valeant represents Ackman’s largest equity holding as of the end of September, which has hit his fund’s performance quite dramatically last year. The increased political attention on drug pricing, regulatory scrutiny, criticism from short sellers, and the termination of a key distribution arrangement stand behind the disastrous performance of Valeant’s shares. The stock is down 42% over the past 12 months, after having lost nearly 8% thus far in 2016. Nonetheless, Pershing Square believes that “Valeant became a smaller and, in our view, even more attractive investment”, as revealed by its most recent letter to investors. Valeant Pharmaceuticals Intl Inc. (NYSE:VRX)’s forward P/E multiple of 7.18 proves the truth of Bill Ackman’s words, but it remains to see whether the billionaire’s investment thesis will turn out to be accurate on this occasion. For comparison, the Drug Retail industry has a forward P/E of 16.3, while the S&P 500 benchmark follows a ratio of 15.87. A total of 88 smart money investors from our system were invested in the struggling company at the end of September, accumulating approximately 29% of its total shares. Jeffrey Ubben’s ValueAct Capital is another major shareholder of Valeant Pharmaceuticals Intl Inc. (NYSE:VRX), holding 14.99 million shares as of September 30.

In another 13D filing, Mark Rachesky’s MHR Fund Management reported owning 30.27 million shares of Lions Gate Entertainment Corp. (USA) (NYSE:LGF), which make up 20.1% of the company’s outstanding shares. This compares with the 40.21 million-share position revealed in MHR’s 13F for the September quarter. The entertainment company is had a terrible start of the year, as its shares have plunged almost 40% year-to-date. Earlier this month, the company released its financial results for the third quarter of fiscal 2016 that ended December 31, which partly explains the disappointing stock performance. Lions Gate Entertainment Corp. (USA) (NYSE:LGF)’s segment revenues for the nine months that ended December 31 reached $1.56 billion, down from $1.75 billion reported for the same period of the prior year. It is particularly interesting that The Hunger Games: Mockingjay 2 ranked among the highest-grossing films of 2015, but its box office performance declined from Mockingjay 1, weighting on the company’s financial performance. After the release of the company’s earnings report, several analysts cut their price targets on the stock. Nonetheless, the stock appears to be slightly undervalued at the moment if solely relying on certain valuation metrics. Lions Gate’s stock is trading at a forward P/E of 10.72, which compares with the industry average ratio of 14.0. Barry Rosenstein of JANA Partners owns 7.18 million shares of Lions Gate Entertainment Corp. (USA) (NYSE:LGF) as of September 30.

As revealed by a newly-amended Form 4 filing, Abrams Capital Management owns 10.36 million shares of Barnes & Noble Inc. (NYSE:BKS), after the acquisition of some 1.69 million shares in three transactions at an average price of $8.00 per unit. This compares with the stake of 6.92 million shares held on September 30. The shares of the retail bookseller are down 5% so far in 2016, partly owning to rumors that Amazon.com Inc. (NASDAQ:AMZN) might have been planning to open hundreds of physical bookstores in the US. However, Amazon’s plans to open bookstores were just a rumor, and the shares of Barnes & Noble recouped the majority of losses caused by the emergence of this rumor. In the meantime, the company’s B&N Retail segment has seen decreasing sales in the past several years due to changing customer preferences, resulting in lower comparable store sales, lower online sales and store closures. Nonetheless, the company has managed to benefit from the reviving growth of the digital book market. There were 23 hedge funds tracked by our team with positions in the struggling bookseller at the end of the July-to-September period, which stockpiled slightly more than 24% of the company’s total shares. Edward A. Mule’s Silver Point Capital was bullish on Barnes & Noble Inc. (NYSE:BKS) at the end of September, holding 2.56 million shares.

Disclosure: None