Rough Patch Continues for Barry Rosenstein’s JANA Partners

JANA Partners LLC is a New York-based hedge fund specializing in event-driven investing founded by well-known activist investor Barry Rosenstein in 2001. JANA Partners usually seeks to identify undervalued companies that have one or more catalysts to unlock value. As Mr. Rosenstein believes “activism has become a tool for greater efficiency and productivity,” his investment firm serves as the instrument for value creation on some occasions by becoming an actively engaged shareholder.

Although activist investors are viewed as aggressive speculators interested in a quick profit rather than the long-term performance of their corporate targets, shareholder activism has become a great tool for driving efficiency in equity markets in recent years. However, JANA Partners LLC is currently experiencing one of its worst performance patches in its entire history. The activist’s main fund recorded negative returns in 12 of the past 19 months through July. JANA Partners, named using the first initials of Mr. Rosenstein’s four children, was down 4.1% this year through the end of July, after having lost 5.4% last year. Last year’s negative return was the firm’s third annual loss since inception. Leaving this discussion aside, this article will discuss several of the activist hedge fund’s major moves completed during the second quarter of 2016.

At Insider Monkey, we track around 760 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details).

JANA Partners Discards Stericycle Inc. (NASDAQ:SRCL) Stake at Profit

JANA Partners sold out its entire stake of 2.42 million shares in Stericycle Inc. (NASDAQ:SRCL) during the second quarter, a stake valued at $306.00 million on March 31. The position accounted for 5.8% of the hedge fund’s overall portfolio at the end of the first quarter. The medical-waste management company has lost 29% of its market value since the beginning of 2016. Stericycle’s stock has suffered two major pullbacks in 2016, one of which having been triggered by the release of the company’s disappointing first-quarter financial results and the subsequent decrease of its 2016 guidance in late April. According to a Fortune article, citing a spokesperson for JANA, the fund sold its stake in the waste management company for a gain in the second quarter before the late April plunge in the value of the company’s stock. Stericycle shares took another hit in late July, after the company said it improperly recognized certain 2015 legal costs and cut its earnings forecast. Richard Driehaus’ Driehaus Capital owns 387,200 shares of Stericycle Inc. (NASDAQ:SRCL) as of June 30.

The next two pages of the article will disclose four other moves completed by JANA Partners LLC during the second quarter.

Barry Rosenstein Trims Stake in Alphabet Inc. (NASDAQ:GOOG)

– Shares Owned by JANA Partners (as of June 30): 513,681
– Value of JANA Partners’ Holding (as of June 30): $355.52 Million

The New York-based activist hedge fund owned 513,681 Class C shares of Alphabet Inc. (NASDAQ:GOOG) at the end of the second quarter, 120,275 shares less than at the end of the second quarter. The position was worth $355.52 million on June 30 and made up 6.1% of the hedge fund’s entire portfolio. Alphabet’s Google has recently released a new app, called Duo, which is set to challenge Apple Inc. (NASDAQ:AAPL)’s FaceTime. Duo, available for iOS and Android, is a simple app for placing video calls between smartphones. The tech giant hopes to make Duo the main video calling app on Android smartphones and turn one-on-one face-to-face calls into a more frequent and natural form of communication. However, without text messaging and group chats, Duo may not be as useful as rival apps. Alphabet has seen its market cap jump by around 3% since the beginning of the year. Stephen Mandel’s Lone Pine Capital LLC reported owning nearly 884,000 Class C shares of Alphabet Inc. (NASDAQ:GOOG) in its latest 13F filing.

Rosenstein Reduces Microsoft Corporation (NASDAQ:MSFT) Position

– Shares Owned by JANA Partners (as of June 30): 6.90 Million
– Value of JANA Partners’ Holding (as of June 30): $352.99 Million

Barry Rosenstein’s asset management firm cut its position in Microsoft Corporation (NASDAQ:MSFT) by 1.73 million shares during the April-June period to 6.90 million shares. The position was worth $352.99 million at the end of June, constituting 6.0% of the fund’s portfolio. Just recently, Microsoft agreed to acquire Beam, a Seattle-based interactive game streaming service that enables viewers to play along with streamers as they watch. Hence, the Xbox maker is making an aggressive move into the live game streaming market, posing a serious threat to services like Twitch and YouTube. In mid-June, Microsoft agreed to acquire professional social networking company LinkedIn Corp. (NYSE:LNKD) for $26.2 billion in cash or $196 per share. The multi-billion-dollar deal is anticipated to close by the end of the current calendar year without facing any regulatory hurdles. Microsoft shares are 3% in the green thus far in 2016. Ken Fisher’s Fisher Asset Management was the owner of 18.30 million shares of Microsoft Corporation (NASDAQ:MSFT) at the end of the second quarter.

JANA Partners Cuts Stake in Walgreens Boots Alliance Inc. (NASDAQ:WBA)

– Shares Owned by JANA Partners (as of June 30): 4.58 Million
– Value of JANA Partners’ Holding (as of June 30): $381.30 Million

JANA Partners reduced its exposure to Walgreens Boots Alliance Inc. (NASDAQ:WBA) by a whopping 6.00 million shares during the three months that ended June 3o, finishing the second quarter with 4.58 million shares worth $381.30 million. The position made up 6.5% of the hedge fund’s overall portfolio. Just recently, the world’s largest drug retailing chain announced plans to shut down two websites, Drugstore.com and Beauty.com, five years after acquiring them as part of the $429 million-acquisition of Drugstore.com in 2011. Walgreens has been unwinding the acquisition to focus on its own website devoted to its flagship drugstore chain, Walgreens.com. According to Internet Retailer, Walgreens represents the 37th largest online retailer in North America, with estimated online sales of $1.3 billion in 2015. Walgreens Boots Alliance’s stock has lost around 3% since the start of the year. Andreas Halvorsen’s Viking Global has 3.47 million shares of Walgreens Boots Alliance Inc. (NASDAQ:WBA) in its portfolio as of the end of the June quarter.

JANA Partners Reduces Exposure to ConAgra Foods Inc. (NYSE:CAG)

– Shares Owned by JANA Partners (as of June 30): 18.04 Million
– Value of JANA Partners’ Holding (as of June 30): $862.32 Million

ConAgra Foods Inc. (NYSE:CAG) was the largest position in JANA Partners’ equity portfolio at the end of the second quarter, accounting for 14.7% of the hedge fund’s portfolio. The activist hedge fund trimmed its ConAgra position by 16% during the June quarter to 18.04 million shares, valued at $862.32 million on June 30. The shares of the maker of well-known packaged foods such as Slim Jim jerky, Hunt’s tomato sauce and Chef Boyardee are up 9% since the beginning of the year. In late July, analysts at Jefferies upped their price target on ConAgra Foods to $56 from $55 and reiterated their ‘Buy’ rating, citing its asset sale valuation framework and the spin-off of its Lamb Weston food-service business. Jefferies analysts believe the company has the potential to unlock approximately $14 billion in incremental value by spinning off undervalued growth assets such as Lamb Weston, “selling brands with a low tax basis using the $4 billion tax loss carry-forward from failed Ralcorp deal to efficiently return cash to shareholders,” and massively enhancing profitability of the remaining businesses. Ken Griffin’s Citadel Advisors owns 2.08 million shares of ConAgra Foods Inc. (NYSE:CAG) as of June 30.

Disclosure: None