Barry Rosenstein of JANA Partners is one of the most visible activist investors in the U.S, one who targets both small and large-cap companies. JANA Partners has been filing 13Fs since 2003 and disclosing its long positions in US securities that are traded in major US exchanges. In recent articles we have discussed JANA Partners’ top small-cap stock picks, as well as its top mid-cap picks, the latter of which beat the S&P 500 Total Return Index by an average of 130 basis points per month between 2003 and 2012. In this article we will focus on JANA’s large-cap stock picks.
Let us explain why it is important to conduct performance analysis and ride the coattails of activist hedge funds like JAA Partners. Rosenstein’s investors achieved annualized returns of around 17% assuming that they have been investing with Rosenstein since day 1. As we mentioned above, outside investors who simply buy JANA’s top mid-cap stocks actually did much better than JANA’s paying investors who enjoyed those 17% annualized returns. The reason is simple: a hedge fund’s returns are higher in the early years of its operation mainly due to survivorship bias. Also as a hedge fund attracts more capital and gets bigger, it starts to invest in more large-cap stocks because it can’t invest all of its new capital in smaller stocks for liquidity and diversification reasons. Our analysis showed that JANA Partners’ top 5 large-cap stock picks returned an average of 0.35% per month between 2003 and 2012. These stocks underperformed the S&P 500 Total Return Index by an average of 30 basis points per month during this ten year period. Piggyback investors don’t have to invest in every stock pick of a hedge fund. Theoretically we know that hedge funds’ large-cap stock picks don’t generate much alpha. Investors then can achieve much higher returns by avoiding hedge funds’ large-cap picks (read the details here), as the case of JANA Partners demonstrates. It is worth noting that the five large-cap stocks discussed in this article alone represent 29.5% of JANA Partners’ entire public equity portfolio.
Given JANA’s poor track record of picking large-cap stocks, investors may be better off avoiding at least some of these names. JANA Partners does, like many other hedge funds, keep a number of positions in large-cap companies. Among them, we find activist positions in Walgreens Boots Alliance Inc (NASDAQ:WBA) of 13.75 million shares and in QUALCOMM, Inc. (NASDAQ:QCOM) of 28.54 million shares, these long positions being the fund’s largest.
JANA Partners increased its stake in the California-based multinational e-commerce website eBay Inc (NASDAQ:EBAY) by 49% during the first quarter, lifting its total stake to 20.00 million shares valued at $1.15 billion. eBay Inc (NASDAQ:EBAY) has returned 11.9% year-to-date and reached its all-time high share price at the end of May, trading at $63.03. Last fall, eBay announced that it was planning to divest its PayPal, which is expected to be done during the third quarter of this year according to Merrill Lynch analysts. Given that, Merrill Lynch has also stepped back from its earlier target price for eBay, expecting the company’s shares to decline after the PayPal spin-off. Other large shareholders in eBay Inc (NASDAQ:EBAY) are Carl Icahn‘s Icahn Capital, who pushed for the PayPal divesture, and Orbis Investment Management.