Jana Partners 2017 Q4 Investor Letter

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In this article we are going to share highlights from Jana Partners’ 2017 Q4 investor letter. JANA Master Fund returned 5.6% net of fees and expenses in 2017 and underperformed S&P 500 Total Return Index’s 21.8% gain. Since inception this fund generated an annualized 10.9% gain vs. S&P 500’s 7.2%. Here is what the fund said about its Q4 performance:

“JANA’s performance in the fourth quarter was driven primarily by our activist positions. Tiffany & Co. (TIF) ended the year on a high note as the late November earnings report was ahead of expectations and in anticipation of the operational improvements that Alex Bogliolo will implement. HD Supply Holdings Inc. (HDS) moved higher on improved earnings that resolve the controversy that erupted in the wake of the June earnings report and because earnings will benefit materially from tax reform. Bloomin’ Brands, Inc. (BLMN) moved higher on the announcement of JANA’s 13D filing. Zimmer Biomet Holdings, Inc. (ZBH) was up on the announcement of Bryan Hanson as the new CEO. The notable laggard was EQT Corp. (EQT), which sold off in response to the closing of the dilutive RICE transaction.”

Jana Partners is very optimistic about 2018. They believe certain parts of the financial markets (like the cryptocurrency space) are overvalued but corporate earnings will continue to go higher even though the overall market seems overpriced based on the market cap to GDP ratio. “Commodity prices have found their footing, increasing rates will help financials, the weaker dollar is a tailwind for overseas revenues, the tax cut is a major tailwind for domestic earnings and we are starting to see signs of corporations putting more money into workers’ pockets, which we would argue is good for America, good for the economy and good for the market,” the fund said.

Jana Partners discussed the following 4 new positions:

1.TEVA Pharmaceutical Industries (TEVA) – We have been following TEVA for years and have had a consistently bearish outlook for the company as we observed negative pricing trends in generics, risk of loss of exclusivity in COPAXONE, poor capital allocation (the purchase of the Allergan plc (AGN) generics business at a peak multiple in 2015 just as pricing was about to roll over), and a heavily indebted balance sheet. This is not the setup we usually look for in a new long! But the audacity of the restructuring plan laid out by new CEO Kåre Schultz in December grabbed our attention and we quickly built a long position. Kåre’s track record driving outstanding shareholder returns at Novo Nordisk A/S (NOVOB DC) and H. Lundbeck A/S (LUN DC) also caught our attention. We believe he will be successful in achieving $3 billion of cost cuts, which will put TEVA on a footing to alleviate its balance sheet problems and return to a future of profitable growth. We pencil in a $30 price target, giving full credit for the cost cuts and debt paydown and an EV/EBITDA multiple of just over 9x on 2020 numbers.

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