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Hedge Fund Blue Harbour’s Top Stock Picks Include Jack in the Box Inc. (JACK)

Blue Harbour has primarily invested in activist situations since its founding in 2004, and recently launched a long-only fund in order to expand its investor base in that strategy. Its flagship fund- which often takes short positions, running afoul of some institutional investors’ requirements- has over $1 billion under management and outperformed the S&P 500 in 2012. The fund was founded by a former partner at private equity giant KKR, Clifton Robbins.

Along with many other hedge funds, Blue Harbour is required to file quarterly 13Fs with the SEC. We track these filings in our database and use the information to develop investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year). We have gone through the fund’s most recent filing and here are its five largest holdings by market value as of the end of March (or see the full filing at the SEC’s website):

Jack in the Box logoBlue Harbour’s top pick was CACI International Inc (NYSE:CACI), a $1.4 billion market cap IT solutions and services company primarily serving defense, intelligence, and national security markets. CACI International Inc (NYSE:CACI) is a popular short target, with the most recent data showing 21% of the float held short despite the fact that the trailing P/E is only 9. Business has started to slip a bit, and we’d imagine that the market is somewhat concerned that cuts to U.S. military spending will result in lower revenue for CACI International Inc (NYSE:CACI) and its peers.

The fund reported a position of 5.5 million shares in iGATE Corporation (NASDAQ:IGTE), another IT services company; iGATE Corporation (NASDAQ:IGTE) has a market capitalization of only about $960 million, but on average about 200,000 shares are traded per day and the current market price is over $16. Wall Street analysts are bullish on the stock, with earnings per share expected to rise considerably over the next couple years with the result being a forward earnings multiple of 9 and a five-year PEG ratio of 0.5, but the market is apparently less optimistic.

Jack in the Box Inc. (NASDAQ:JACK) was another of Blue Harbour’s top picks with the filing disclosing ownership of a little over 3 million shares. The quick service restaurant company- which also owns the Qdoba’s Mexican Grill brand- carries a premium valuation in the market at 25 trailing earnings, matching the high prices of many of its industry peers. In its most recent quarter earnings were up strongly compared to the same period in the previous fiscal year although revenue growth was only 2% and so this degree of improvement in net income is likely not sustainable.

Robbins and his team disclosed ownership of 4.3 million shares of women’s apparel and accessories retailer Chico’s FAS, Inc. (NYSE:CHS). The company’s fiscal year ended in early February, with the fourth quarter of the year showing double-digit growth rates in both revenue and earnings versus a year earlier. The trailing P/E is 18, so while Chico’s FAS, Inc. (NYSE:CHS)’s is not a pure value stock it may offer “growth at a reasonable price.” Renaissance Technologies, founded by billionaire Jim Simons, cut its stake in Chico’s FAS, Inc. (NYSE:CHS)’s by 20% during Q4 2012 but still owned 3.8 million shares as of the end of December (find Renaissance’s favorite stocks).

Blue Harbour had 3.6 million shares of Progressive Waste Solutions Ltd (USA) (NYSE:BIN) in its portfolio per the 13F. The waste management company is an interesting potential defensive pick: its beta is 0.5 (and that makes sense, given the industry’s stability) and the dividend yield is 2.4% at current prices. Financial performance has also been strong, although investors may have already caught onto the opportunity at Progressive Waste Solutions Ltd (USA) (NYSE:BIN) seeing as its trailing and forward earnings multiples are 27 and 20 respectively.

Both Progressive and Jack in the Box Inc. (NASDAQ:JACK) seem a bit pricy for our attention at this time. Chico’s is trading a bit more cheaply, and with the retailer showing good results recently we’d be interested in taking a closer look at the company. As for the IT companies leading the list of Robbins’s picks, we think it might be best to wait a bit- due to sequestration in the case of CACI, and due to the implied high earnings growth that analysts are expecting at iGate.

Disclosure: I own no shares of any stocks mentioned in this article.

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