Some bright minds of the finance world believe that shareholder activism has surged in recent years because of increased market efficiency. Hedge funds and other investors may find it really hard to stumble upon pricing discrepancies, thanks to the surge in high-frequency trading. Therefore, activist hedge funds tend to change the future performance of some companies instead of trying to predict their future performance. A number of more than 500 activist hedge funds had over $140 billion in assets under management at the end of June, marking an increase of 18% as compared with the figure registered at the beginning of the year. With that in mind, let’s proceed with the analysis of two 13Ds (activist) filed with the SEC by two widely-known hedge funds tracked by Insider Monkey.
Following activist funds is important because it is a very specific and focused strategy in which the investor doesn’t have to wait for catalysts to realize gains in the holding. An activist fund can simply create its own catalysts by pushing for them through negotiations with the company’s management and directors. In recent years, the average returns of activists’ hedge funds has been much higher than the returns of an average hedge fund. Furthermore, 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. We have found through extensive research that the top small-cap picks of hedge funds are also capable of generating high returns and built a system around this premise. In the 38 months since our small-cap strategy was launched it has returned over 102% and beaten the S&P 500 ETF (SPY) by more than 53 percentage points (read more details). Soon, we’ll be releasing a new quarterly newsletter written by former activist hedge fund analyst Michael Bland that tracks ten or so activist campaigns at any given time.
According to a freshly-amended 13D filing, Jeffrey C. Smith’s Starboard Value owns 30.22 million shares of Office Depot Inc. (NASDAQ:ODP), which include call options underlying 25.00 million shares. Starboard Value owned 44.74 million shares in the supplier of office products and services as of September 30, along with an additional 4.05 million shares in call options. On February 4, Office Depot and Staples Inc. (NASDAQ:SPLS) announced a merge deal, under which Staples was set to acquire all the outstanding shares of Officer Depot. The terms of the deal say that Office Depot shareholders will receive $7.25 in cash and 0.2188 of Staples common stock. Earlier this month, the Federal Trade Commission (FTC) informed the two parties engaged in the potential merger that the FTC intends to block the aforementioned combination. In response, both companies announced their intentions to contest the FTC’s decision, but the deal is likely to fail unless the duo persuades a federal judge that “the FTC’s decision is based on a flawed analysis and misunderstanding of the intense competitive landscape in which Staples and Office Depot compete”. Meanwhile, the company’s sales in its North American Division (which accounts for roughly 43% of the company’s sales) totaled $1.60 billion for the third quarter of 2015, down from $1.72 billion reported a year ago. This decreased was mainly attributable to the company’s real estate strategy to close 400 retail stores through 2016.
Office Depot Inc. (NASDAQ:ODP)’s shares have declined by 33% this year. Meanwhile, the fact that Starboard Value has been gradually cashing out its holding in the company might suggest that the Office Depot-Staples deal will most likely fail to go through. The number of smart money investors with stakes in Office Depot declined to 47 from 49 during the September quarter, while the aggregate value of these stakes dropped to $964.83 million from $1.36 billion. Hedge funds monitored by the Insider Monkey team stockpiled 27.40% of the company’s outstanding shares on September 30. Eric Mindich’s Eton Park Capital reported owning 12.50 million shares of Office Depot Inc. (NASDAQ:ODP) via its 13F filing for the September quarter.
Follow Jeffrey Smith's Starboard Value LP
Let’s head to the second page of this article, where we discuss the 13D filing submitted by Broadfin Capital.
In a separate 13D filing, Kevin Kotler’s Broadfin Capital reported owning 2.56 million shares of Derma Sciences Inc. (NASDAQ:DSCI), accounting for 9.9% of the company’s outstanding common stock. This compares with the 2.36 million-share position disclosed through the latest round of 13F filings. The tissue regeneration company focuses on three main segments of the wound care marketplace: advanced wound care, traditional wound care, and pharmaceutical wound care products. The company’s gross sales for the nine-month period that ended September 30 added up to $72.50 million, which compares with $68.53 million reported for the same period a year ago. Although Derma Sciences Inc. (NASDAQ:DSCI)’s net loss for the first nine months of 2015 tightened to $28.86 million from $30.20 million a year earlier, the company is still a long way from profitability. Nonetheless, the company intends to invest more resources into its sales and marketing activities in an attempt to spur demand for higher-margin advanced wound care products and reach more presence in Asia, the Pacific, and Latin America. At the same time, Derma Sciences anticipates that its drug candidate Aclerastide, which is pending the New Drug Application approval and is expected to be launched in three years, has great market potential. This product candidate is designed to treat diabetic foot ulcers. In the meantime, the shares of the company are 50% in the red year-to-date, which might represent a good point of entry for interested investors.
It appears that the smart money sentiment towards the stock did not change substantially during the third quarter, as the number of hedge funds with positions in the company remained unchanged quarter-on-quarter at 17. Nevertheless, the value of their investments declined to $59.65 million from $113.18 million during the three-month period, mainly on the back of a disappointing stock performance. These smart money investors amassed 49.10% of the company’s outstanding shares at the end of September. Baker Bros. Advisors, founded by Julian and Felix Bakers, is the largest equity holder of Derma Sciences Inc. (NASDAQ:DSCI) among the hedge funds tracked by our team, holding 3.46 million shares as of September 30.
Follow Kevin Kotler's Broadfin Capital
Disclosure: None
