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Five Stocks that Helped Starboard Value’s Equity Portfolio Return 6.5% in Q1

If one starts a discussion on activist investors or their campaigns today, there is only a slim possibility that the name Starboard Value LP won’t come up.  In the last five years since its separation from Ramius in 2011, the fund headed by Jeffrey Smith has launched 46 activist campaigns against the mightiest corporations in America and has achieved success in a number of them. However, this article isn’t about the fund’s growing reputation as the leading activist investor on the Street. Rather, we are more interested in the fund’s performance and how its investments have been doing in the past few months, regardless of whether they were active or passive stakes. An analysis done by Insider Monkey of Starboard Value LP’s 13F holdings in companies worth at least $1 billion shows that the 17 long positions held by the fund delivered a weighted average return of 6.5% during the first quarter versus flat returns generated by the broader market during the same period. Since the fund is performing relatively well, in this post, we are going to take a look at five stocks that helped it the most in generating positive returns during the first quarter.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

Jeffrey Smith
Jeffrey Smith
Starboard Value LP

Let’s start with diversified healthcare company Baxter International Inc (NYSE:BAX). After having initiated a stake during the third quarter, Starboard Value LP boosted it by 92% to 2.4 million shares during the fourth quarter. Baxter International Inc (NYSE:BAX) made headlines last year after Dan Loeb‘s Third Point, another activist investor, initiated a position in the company and managed to get its nominees on the company’s Board. At the end of 2015, Third Point was the largest shareholder of Baxter International Inc (NYSE:BAX) among funds covered by us with ownership of 53.85 million shares of the company. Shares of Baxter International Inc ended the third quarter with gains of 8% and are currently trading up 9.5% year-to-date. On March 11, Baxalta Inc (NYSE:BXLT), which was spun off from Baxter International last year, filed to sell $2.34 billion worth of shares owned by Baxter International in a debt-for-equity deal. After the completion of this transaction, Baxter International’s stake in Baxalta (NYSE:BXLT) was cut to 4.5% from 13.8%. However, the company plans to unload its entire stake in Baxalta (NYSE:BXLT) in the coming months through similar debt-for-equity exchanges.

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Starboard initiated a stake in Macy’s, Inc. (NYSE:M) during the second quarter of 2015 and increased it by 12% and 2% during the third and fourth quarters respectively. After having added the company to Starboard’s equity portfolio, Mr. Smith spoke at the Delivering Alpha conference in July, where he explained why he thought Macy’s, Inc. (NYSE:M) was undervalued.  Though at that time he didn’t reveal a plan that can help the company to unlock shareholder value, he released a presentation earlier this year which showed how Macy’s, Inc. (NYSE:M) could boost its stock price to $70 by monetizing its real estate assets. Billionaire David Einhorn, whose fund, Greenlight Capital, initiated a stake in the company during the fourth quarter, also shares the same opinion. In a letter to his investors, Mr. Einhorn wrote, “it wouldn’t surprise us if a private equity firm teamed up with a REIT to buy the company and unlock the value privately.” Despite having appreciated by 26% during the first quarter, Macy’s stock is currently trading up by only 13% year-to-date due to the 10% decline it has seen since the beginning of April.

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In secure logistics firm Brink’s Company (NYSE:BCO), Starboard initiated a stake during the first quarter of 2015 and more than doubled it during the second quarter. The firm launched an activist campaign against the company immediately after initiating its stake, publicly criticizing Brink’s Company (NYSE:BCO)  for its strategy and financial performance. At the end of 2015, the fund had a 12.4% stake in the company through 4.57 million shares that it owned directly and another 1.45 million shares that it beneficially owned as part of a cash-settled total return swap agreement with Société Générale. At the beginning of this year, Brink’s Company (NYSE:BCO) reached an agreement with Starboard Value LP, under the terms of which, the company added three new directors to its Board and announced that its Chairman and CEO, Thomas Schievelbein, would step down. Though shares of Brink’s Company failed to take off initially after this agreement was reached, they ended the first quarter up by 16.8%. The company currently pays a quarterly dividend of $0.10, which translates into an annual dividend yield of 1.10%.

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Let’s move on to another company against which Starboard Value LP launched an activist campaign soon after initiating a stake and whose shares are performing well this year. Insperity Inc (NYSE:NSP) became a part of Starboard’s portfolio during the last quarter of 2014 and in the following quarter the fund increased its stake in the company by 194% to 3.33 million shares. From the end of first quarter of 2015 till March 15 this year, the fund has continued to own the same number of shares of the company. In January, 2015, Mr. Smith wrote a letter to the company’s Board and its CEO in which he outlined a broad plan for the company to improve its performance and also suggested that it should look out for a suitor. Although Insperity Inc (NYSE:NSP) didn’t agree with everything that Mr. Smith stated, the parties reached an agreement in March, 2015, and appointed three of his nominees to the Board. On March 15, Starboard nominated John Morphy and Michael F. Shea as director candidates for election to the company’s Board of Directors at its 2016 annual shareholders meeting and added that the company ” has made progress over the past year, but that [Insperity] remains undervalued and that additional opportunities remain to improve the Issuer’s operations and corporate governance”. Insperity Inc (NYSE:NSP)’s stock gained 8% during the first quarter, but is yet to break above the $52 mark.

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Finally, let’s take a look at Starboard Value’s most-discussed holding, Yahoo! Inc. (NASDAQ:YHOO). At the end of 2015, Starboard owned 7.1 million shares of the company worth $236.27 million. The fund has been constantly suggesting new ideas and future courses of action to Yahoo! Inc. (NASDAQ:YHOO)’s Board since it initiated a stake during the third quarter of 2014. In March, Starboard  launched a proxy fight against Yahoo! by nominating nine director candidates to replace all of the current Board members of the company. Yahoo! Inc. (NASDAQ:YHOO)’s stock has seen a consistent uptrend since it reached a 52-week low of $26.15 in February and owing largely to that ended the first quarter up by over 10%. On April 8, the company extended the deadline for other companies to bid for its core businesses by a week, to April 18. In a note released the same day, SunTrust’s tech analyst Robert Peck wrote: “Yahoo’s core can be sold for $6-8B, which is accretive to shareholders (even after taxes) given its negligible public value today.” Billionaire David E. Shaw‘s  D.E. Shaw reduced its stake in the company by 26% to 8.12 million shares during the fourth quarter.

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Disclosure: none