JANA Partners is known for its activist campaigns. We like to track activist hedge funds because they don’t have to wait for a catalyst to realize gains in their portfolio holdings. They can spend a couple of million dollars, launch an aggressive activist campaign, and create their own catalysts. In recent years passive mutual funds noticed that they can enjoy higher returns by supporting hedge funds’ activist campaigns that make business sense. This renaissance in mutual fund voting practices enabled activist hedge funds to take on bigger targets that were once unreachable. Apple Inc. (NASDAQ:AAPL)’s Tim Cook listened to Carl Icahn not because Icahn is a scary guy or owns a huge stake in Apple Inc. Tim Cook entertained Icahn’s demands because they made business sense and large passive shareholders were likely to back Icahn if Icahn launched a proxy fight.
This current form of activism is very promising for passive mutual/index fund investors. Passive investors can’t beat the market by supporting activists, but average market returns go up when they support activists. Activist hedge fund investors and do-it-yourself investors who imitate activists’ moves benefit even more. In recent years average returns of activists’ hedge funds were much higher than the returns of an average hedge fund. We believe do-it-yourself investors have an advantage over activist hedge fund investors because they don’t have to pay 2% of their assets and 20% of their gains every year to compensate hedge fund managers. In this article we will analyze JANA Partners’ recent performance to shed some light on this issue.
JANA Partners lost 4.6% in January and recouped its loses with a 6.7% gain in February. These are very volatile returns for a hedge fund. One of the reasons for strong activist performance is the fact that activist hedge funds aren’t completely hedged. Some activist hedge funds go 80-90% net long on the belief that their positions are less risky than the market. JANA Partners has been holding some put options on the S&P 500 Index and an energy ETF to hedge some portion of its portfolio. However, its recent volatile returns indicate that these positions weren’t big enough to dampen the volatility significantly.
We take a different approach on our site. Our experience has shown that investors can usually generate better returns by imitating a hedge fund’s stock picks than directly investing in a hedge fund. Some hedge funds are closed to investors, so investing in those hedge funds isn’t even an option for investors. Other hedge funds charge large fees which take away a big portion of the alpha generated by those hedge funds. JANA Partners’ investors returned 1.8% in the first 2 months of the year. A portfolio of their stock holdings that are disclosed in their 13F filing would have returned -3.9% in January and 10.7% in February. The cumulative return of this portfolio is 6.5% which is nearly 5 percentage points better than JANA’s actual returns.
The best performing stocks in JANA’s 13F portfolio was Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and Salix Pharmaceuticals, Ltd. (NASDAQ:SLXP) which agreed to be acquired by Valeant last month. Salix returned 37% and Valeant delivered a 38% gain for investors during the first two months of the year. Valeant Pharmaceuticals International was the third most popular healthcare stock among hedge funds (see the list here). JANAs biggest position, Walgreens Boots Alliance Inc (NASDAQ:WBA), also contributed to large gains for JANA. Walgreens Boots Alliance, which is also one of the ten most popular healthcare stocks, returned 9.5% during the first two months of 2015. Here are the returns of each stock that is in JANA’s 13F portfolio at the end of December:
|Walgreens Boots Alliance||WBA||9.5%|
|Hertz Global Holdings||HTZ||-7.5%|
|Aercap Holdings N.V.||AER||14.6%|
|HD Supply Holdings Inc.||HDS||0.1%|
|Charter Communications Inc.||CHTR||8.4%|
|Rackspace Hosting Inc||RAX||6.1%|
|American International Group Inc.||AIG||-1.2%|
|Liberty Interactive Corporation||QVCA||0.4%|
|Computer Sciences Corporation||CSC||12.5%|
|Salix Pharmaceuticals Ltd.||SLXP||36.8%|
|Golar LNG Limited||GLNG||-14.9%|
|Kinder Morgan Inc.||KMI||-2.0%|
|Energy Transfer Equity L.P.||ETE||12.2%|
|Applied Materials Inc.||AMAT||0.9%|
A large number of these stocks are targeted by activist investors (either JANA or other activists). JANA sits on the board of Walgreens Boots Alliance. Activist Jeff Ubben‘s ValueAct has been engaged with Valeant Pharmaceuticals International for a very long time. Carl Icahn won three board seats at Hertz Global Holdings (NYSE:HTZ) last September. After that, JANA boosted its stake in Hertz Global Holdings and filed a 13D. PetSmart, Inc. (NASDAQ:PETM), Ashland Inc (NYSE:ASH), and Computer Sciences Corporation (NYSE:CSC) are other stocks that have been targeted by JANA through activist campaigns. Carl Icahn has been targeting eBay Inc (NASDAQ:EBAY) for a while now. Billionaire Dan Loeb also boosted his stake in eBay Inc. to over $560 million by the end of 2014. We like eBay Inc. as a potentially profitable spinoff play as well. NCR Corporation (NYSE:NCR), Rackspace Hosting, Inc. (NYSE:RAX), and AerCap Holdings N.V. (NYSE:AER) are stocks targeted by other activists. Activist investors usually allocate some portion of their portfolios to stocks that are targeted by other activists. We believe investors would benefit more by imitating activists themselves rather than paying someone else to do the same.