Infoblox, Depomed, Insperity: Inside Starboard Value’s 5 Biggest Moves of Q2

Founded by Jeffrey Smith in 2002 via a spin-off from Ramius, Starboard Value LP has grown to become one of the most feared activist hedge funds in the corporate world. Although the fund only manages assets worth around $4.7 billion, considerably less than some of its peers, the number of successful proxy fights and activist campaigns it has launched over the past decade-and-a-half put many other activist funds to shame. The New York-based fund recently submitted its 13F filing with the SEC for the reporting period of June 30, revealing a U.S. equity portfolio containing $2.82 billion worth of holdings.

According to the filing, Starboard Value’s equity portfolio consisted of 24 long positions at the end of the  second quarter and its top-10 holdings accounted for over 85% of its portfolio’s value. The filing also revealed that during the second quarter the fund initiated a stake in six stocks, added more shares to four positions, reduced the size of its holdings in eight stocks, and sold out of one equity entirely. In this post, we will take a look at five major moves the fund made during the second quarter and discuss how those stocks have performed this year.

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Infoblox Inc (NYSE:BLOX)

– Shares Owned by Starboard Value LP (as of June 30): 3.85 Million

– Value of Holding (as of June 30): $72.23 Million

Let’s start with Infoblox Inc (NYSE:BLOX), which was a new entrant to Starboard Value’s equity portfolio during the second quarter. A month after the fund disclosed initiating a stake in the company and declared its shares undervalued, Bloomberg reported that Infoblox Inc (NYSE:BLOX) has hired Morgan Stanley for activist defense. Infoblox shares have been trading in a range for the past 11 months, however they spiked on May 11 after reports emerged that the company had received a buyout proposal from private equity firm Thoma Bravo. Owing largely to that spike, they are currently trading up by 7% year-to-date. On June 12, the company announced that it would be laying off 12% of its workforce, or 110 employees under its restructuring program. Analysts expect Infoblox to report EPS of $0.06 on revenue of $84.51 million for its fourth quarter of fiscal year 2016. For the same quarter of the previous fiscal year, Infoblox pulled in EPS of $0.12 and revenue of $87 million. Billionaire Jim Simons‘ Renaissance Technologies upped its stake in the company during the second quarter by 24% to 1.23 million shares.

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Insperity Inc (NYSE:NSP)

– Shares Owned by Starboard Value LP (as of June 30): 1.5 Million

– Value of Holding (as of June 30): $115.54 Million

Starboard made a wise decision by cutting its stake in Insperity Inc (NYSE:NSP) by 56% during the second quarter, as shares of the company have slumped hard this month following its second quarter earnings release. The fund initiated its stake in the company during the last quarter of 2014 and launched an activist campaign against it immediately after, urging the company to consider selling itself or to look for other options to enhance its value. Though the company and the fund reached a settlement last year, Starboard launched a proxy fight against the company in March by nominating two dissident directors to its Board after fresh talks between Insperity Inc (NYSE:NSP) and the fund grinded to a halt. Nevertheless, the company and the fund again reached a settlement in May, under which Insperity agreed to appoint John Morphy, who was one of Starboard’s nominees, as a Class III director to its Board. Despite losing a large part of the gains they made earlier in the year during July, shares of Insperity are still trading up by 37.31% year-to-date. The company currently pays a quarterly dividend of $0.25 per share which translates into an annual dividend yield of 1.50%. Michael R. Weisberg‘s Crestwood Capital Management lowered its stake in the company by 29% to 134,832 shares.

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We’ll delve into three more big moves made by Mr. Smith’s firm on the next page.

Depomed Inc (NASDAQ:DEPO)

– Shares Owned by Starboard Value LP (as of June 30): 6 Million

– Value of Holding (as of June 30): $118.01 Million

Moving on, Starboard Value more than doubled its stake in Depomed Inc (NASDAQ:DEPO) during the second quarter, increasing it by 104%. Following that increase, Starboard Value now owns nearly 9.9% of Depomed Inc (NASDAQ:DEPO)’s outstanding shares, which gives the fund the right to call a shareholder meeting to replace the directors of the company under the laws in California, where Depomed is incorporated. On April 8, the fund sent a letter to Depomed’s Chief Executive Officer, Jim Schoeneck, calling the shares of the company undervalued and seeking to replace the entire six-member board of the company by calling just such a special shareholder meeting. On July 28, Starboard Value released another letter in which it announced that it has appointed two qualified advisors, Robert G. Savage and James L. Tyree, to assist in its solicitation efforts to call a special meeting of shareholders. Moreover, in the letter, the fund also stated its intent to invite Mr. Savage and Mr. Tyree to join Depomed’s Board. On August 3, Depomed reported its second quarter results, declaring EPS of $0.27 on revenue of $116.70 million, largely in-line with analysts’ expectations of EPS of $0.26 on revenue of $118.20 million. Manoneet Singh‘s Kavi Asset Management also raised its stake in the company during the second quarter, by 254% to 348,300 shares.

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Darden Restaurants, Inc. (NYSE:DRI)

– Shares Owned by Starboard Value LP (as of June 30): 3.89 Million

– Value of Holding (as of June 30): $246.4 Million

After reducing its stake in Darden Restaurants, Inc. (NYSE:DRI) by 44% during the first quarter, Starboard Value proceeded to further reduce it by another 42% during the second quarter. The fund initiated its stake in the full-service restaurant company during the final quarter of 2013 and launched a public battle against it in 2014. In the months that followed, Starboard managed to win its proxy fight against Darden Restaurants, Inc. (NYSE:DRI), ousting the entire board of the company and spinning off some of its real estate assets into Four Corners Property Trust Inc (NYSE:FCPT). In April, Mr. Smith announced his resignation as the company’s Chairman, 18 months after taking control of its board. Following Mr. Smith’s departure, Darden Restaurants, Inc. (NYSE:DRI)’s stock has largely been range-bound and is currently trading down by 3.14% year-to-date. The company is expected to report its fiscal year 2017 first quarter earnings by the end of this week and the consensus estimate among analysts is for it to report EPS of $0.82 on revenue of $1.72 billion. For the same quarter of the company’s 2016 fiscal year, it reported EPS of $0.68 on revenue of $1.69 billion.

Advance Auto Parts, Inc. (NYSE:AAP)

– Shares Owned by Starboard Value LP (as of June 30): 2.75 Million

– Value of Holding (as of June 30): $445.29 Million

The second quarter of 2016 was the first time that Starboard Value increased its stake in Advance Auto Parts, Inc. (NYSE:AAP), since first opening it during the third quarter of 2015, as it hiked its stake by 62%. The fund released a presentation on the company immediately after disclosing its new stake last year, in which it urged the company to improve its margins, return capital to shareholders, and pursue industry consolidation. It seems that Advance Auto Parts, Inc. (NYSE:AAP) has yet to effectively implement the fund’s suggestions, as it yet again reported weaker than expected earnings on August 16, on the back of a decline in same-store sales. While analysts had expected the company to report EPS of $2.14 on revenue of $2.24 billion for the second quarter, Advance Auto Parts declared EPS of $1.90 on revenue of $2.26 billion. Following the quarterly earnings release, Advance Auto Parts, Inc. (NYSE:AAP)’s stock has taken a hit, though it is still trading up by 6% year-to-date. At the beginning of this month, analysts at Deutsche Bank reiterated their ‘Buy’ rating on the stock while upping their price target on it to $180 from $160. A hedge fund that sold its entire AAP stake during the second quarter was Jacob Gottlieb’s Visium Asset Management.

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Disclosure: None