‘Most Feared Man in Corporate America’ Jeff Smith’s Top 10 Stock Picks

In this article we take a look at Jeffrey Smith’s top 10 stock picks. You can skip our detailed discussion of Smith’s history, his hedge fund’s performance and go to Jeff Smith’s Top 5 Stock Picks.

Jeffrey Chad Smith is an American activist investor and hedge fund manager who founded Starboard Value in 2002. The fund manages about $4 billion in managed securities as of the end of the 2020. Famously called the “most feared man in corporate America” by Fortune, Smith has an eye for detecting unrealized potential in companies. His investment strategy is simple: build stakes in companies that are undervalued and undergoing management inefficiencies and force them to work hard and correct course to unlock value.

The King of Turnarounds

The 49-year-old, who has an economics degree from the Wharton School of the University of Pennsylvania, stunned the financial markets in 2014 by successfully ousting the entire board of Olive Garden-owner Darden Restaurants.  In less than two years, Smith oversaw an exemplary turnaround at the company, resulting in a 40% increase in Darden’s market value.  He then gracefully resigned from Darden’s board and moved on to his next targets.  Smith in 2014 built a notable stake in Yahoo! and asked the company to consider merging with AOL to revive profitability. Other famous activist moves by Smith involved AOL, Office Depot, Mellanox Technologies, Macy’s and Papa John’s Pizza.

About 80% of Starboard Value’s activist campaigns have been profitable, while the fund posted annualized returns of 15.5% through 2014.

For Smith, generating value through businesses runs in the family. His mother was a real estate broker while his father was the founder of the Fresh Juice Company, where Smith worked as VP Strategic Development. Smith also worked as a financial analyst in the M&A department of LSG Advisors. He also worked at Ramius Capital — the hedge fund of American investor and Cowen’s CEO Peter Cohen — before starting Starboard Value.

Jeffrey Smith's Top 10 Stock Picks

Jeff Smith has initiated several SPAC deals recently. Last year, Starboard said it planned to raise $300 million through a blank-check acquisition vehicle called Starboard Value Acquisition Corp (SVAC). Talking to CNBC last year about SPACs, Smith said:

“What we do in Starboard is we invest in undervalued under-managed companies that are under earning, where we can get involved and make a difference. Those are public companies already. We buy a stake in those companies and we work with the management team to get them to perform better, to focus on their core business, and to improve their bottom line results, and therefore prove value for the benefit of all shareholders. We’re usually one of the larger shareholders… For SVAC, we’re looking to find similar companies that are private, they start out private and then we merge them into SVAC, and we’re really good at taking those businesses and using our expertise as public company managers, and board members, and governance experts in improving the discipline, improving the focus, improving the revenue growth rate, improving the operating margins… We’re looking to use SVAC to take a great private company and make it better, to a great brand, a great business, a business that should be well positioned in its space, but maybe isn’t reaching all of its potential and for us to be able to transform that business and make it different, and make it better.

We at Starboard, we don’t do the same thing that everybody else does. We take a look at what’s happening and we try and make it better, different, and on brand for what we do. That’s what we do. We are highly highly operational. We transform businesses. We see this as a great opportunity and a great opportunity for those kinds of businesses. Whether somebody would choose to work with Starboard, we did some other things that were different with SVAC is we looked at our relationship network, we have amazing relationships from the past 17 years of doing what we do in all different industries, with great operators, and we combine some of our best relationships into SVAC.

There’s a common misperception out there that people don’t want to hear from us. Well you know, Jeff Smith is calling, is anybody going to pick up the phone? It does not really work that way. People love talking to us. They think we are smart, they think we are really good at what we do, and they want to hear our ideas for how they can transform their business companies that may be afraid to talk to us that would be in the public marketplace would be ones that would be insecure. They would be worried that if we got involved, that maybe we might replace them as a manager. That’s because they could be vulnerable and they are not performing well.”

Smith is an outlier in a struggling industry. The hedge fund industry is losing ground amid severe losses. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.

Let’s start our list of Jeffrey Smith’s top 10 stock picks.

10. Box, Inc. (NYSE: BOX)

Value: $198,132,000
Percent of Jeffrey Smith’s 13F Portfolio: 5.03%
No. of Hedge Fund Holders: 31

Box ranks 10th on the list of Jeff Smith’s top 10 stock picks. Starboard Value increased its hold in the company by 20%, ending the fourth quarter with a $198.13 million stake in the company. Box shares recently rallied after the company beat Q4 estimates. Its revenue jumped 8% to $198.9 million, while billings were up 10%.  Adjusted operating margin expanded to 18% from 7%. Box shares are up 138% over the last 12 months.

As of the end of the fourth quarter, 31 hedge funds in Insider Monkey’s database of 887 funds held stakes in Box Inc., compared to 41 funds in the third quarter. Jeffrey Smith’s Starboard Value is the biggest stakeholder in the company, with 10.97 million shares.

9. MEDNAX, Inc. (NYSE: MD)

Value: $207,363,000
Percent of Jeffrey Smith’s 13F Portfolio: 5.27%
No. of Hedge Fund Holders: 18

Florida-based Mednax Inc. ranks 9th on the list of Jeff Smith’s top 10 stock picks. Mednax collaborates with hospitals, health systems and health care facilities to offer clinical services. The company’s shares have gained 150% over the last 12 months. In the fourth quarter, the company posted non-GAAP EPS of $0.25, missing the Street’s estimates by $0.11. Revenue in the quarter fell 9% to $417 million, missing the consensus by $43.29 million.

Starboard Value is one of the 18 hedge funds tracked by Insider Monkey having stakes in MEDNAX at the end of the fourth quarter. The fund owns over 8.45 million shares of the company. In their Q4 2020 investor letter, Silver Ring Value Partners’ highlighted a few stocks and Mednax Inc. (NYSE:MD) is one of them. Here is what Silver Ring Value Partners’ said:

“Mednax is a business that I have followed for many years. The crown jewel is the pediatric business, in which the company provides physician staffing to neonatal intensive care units (NICUs) and related specialties at various hospitals. It’s a business with a strong competitive advantage given the company’s dominant position, very inelastic demand and limited reimbursement risk.

The pediatric business has moderate organic growth characteristics, which the prior management supplemented with many tuck-in acquisitions over the years. These acquisitions leveraged the back office scale while allowing the local physician groups’ autonomy of operation.

Unfortunately, the company eventually ran out of meaningful acquisitions to make in this space, and the old management was unsatisfied with simply running a very entrenched, high ROIC and FCF business and returning capital to shareholders. Instead, they took on extra debt to pursue growth through acquisitions in what they considered to be adjacencies: first in anesthesiology and then in radiology.

Not surprisingly, these adventures outside the company’s area of core competitive advantage didn’t go well. Debt piled up far faster than profits. This led to an activist investor nominating directors to the board, and then the board replacing the CEO.(read the complete letter here)

8. Merit Medical Systems, Inc. (NASDAQ: MMSI)

Value: $221,157,000
Percent of Jeffrey Smith’s 13F Portfolio: 5.62%
No. of Hedge Fund Holders: 20

Merit Medical Systems Inc. is among Jeff Smith’s Starboard Value’s top 10 stock picks, as the firm owns 3.98 million shares of the company, worth $221.16 million. Utah-based Merit Medical makes medical devices used in treatments related to cardiology, radiology, oncology, critical care and endoscopy. The company recently enrolled first patients in its Wrapsody ArterioVenous Access Efficacy Pivotal Study of the WRAPSODY Endovascular Stent Graft, a device being studied for the treatment of stenosis or occlusion within dialysis outflow circuits.

There were 20 hedge funds that hold a position in MMSI in the fourth quarter of 2020.

7. Green Dot Corporation (NYSE: GDOT)

Value: $245,980,000
Percent of Jeffrey Smith’s 13F Portfolio: 6.25%
No. of Hedge Fund Holders: 32

Green Dot Corp ranks 7th on the list of Jeff Smith’s top 10 stock picks. Green Dot is a fintech company whose platform is used by major companies including Apple Pay Cash, Uber and Intuit. It also offers debit cards and payments solutions. Green Dot shares have gained 1145 over the last 12 months. In February, investment firm Craig-Hallum reiterated a Buy rating for GDOT after the company’s stock plunged following weak quarterly results.

The company is getting the attention of the smart money, as 32 hedge funds tracked by Insider Monkey reported owning stakes in the company at the end of the fourth quarter, up from 28 funds a quarter earlier.

6. Commvault Systems, Inc. (NASDAQ: CVLT)

Value: $247,463,000
Percent of Jeffrey Smith’s 13F Portfolio: 6.29%
No. of Hedge Fund Holders: 23

CommVault Systems Inc. sells data privacy and data protection services. Jeff Smith’s Starboard Value in the fourth quarter increased its stake in the company by 4%, ending the period with a $247.46 million stake in the company. In January, the stock jumped after Piper Sandler upgraded the company’s rating to Overweight from Neutral. The firm also upped its price target for the company to $68 from $45. In the third quarter, CommVault beat consensus estimates for adjusted EPS and posted a 6.6% increase in revenue.

A total of 23 hedge funds tracked by Insider Monkey were bullish CVLT at the end of the fourth quarter, down from 24 funds a quarter earlier. Jeffrey Smith’s Starboard Value is the biggest stakeholder in the company, with 4.5 million shares, worth $247.5 million.

Click to continue reading and see Jeffrey Smith’s Top 5 Stock Picks.

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Disclosure: None. Jeffrey Smith’s Top 10 Stock Picks is originally published on Insider Monkey.