Starboard Value Warns of Looming Election Contest at Insperity Inc. (NSP), Plus 3 Other Activist Moves

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It has been shown in the past that activist hedge funds can deliver above-average returns that are uncorrelated with broader market returns, but that has not been the case in the past year or so. S&P’s U.S. Activist Interest Index, which tracks the performance of stocks targeted by activist investors, has lost 21% over the past year, whereas the S&P 500 Index has returned slightly below 1% over the same time span. Nonetheless, retail investors tracking activists’ moves need not to worry about the disappointing performance of this group of investors, considering that some turnarounds may take time to bear fruit. It would be more appropriate to look at the returns generated by each activist target individually rather than look at this basket of stocks as a whole. The main problem with tracking the entire group of targets is that some activist campaigns can take more than five years to yield some results, while others can take less than two years. Therefore, the disappointing returns of some long term-oriented campaigns may subdue the strong returns delivered by short-lived campaigns. Having said that, this article will examine four SEC filings submitted by several activist investment vehicles tracked by Insider Monkey.

At Insider Monkey, we track around 730 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 about our small-cap strategy).

According to a newly-amended 13D filing, Jeffrey Smith’s Starboard Value LP owns nearly 3.34 million shares of Insperity Inc. (NYSE:NSP), which account for 15.7% of the company’s outstanding common stock. The position has not undergone any changes thus far in 2016, as Starboard Value owned the same amount of shares on December 31. However, the filing was submitted to report that the activist hedge fund delivered a letter to Insperity on March 12, nominating John Morphy and Michael F. Shea as director candidates for election to the company’s Board of Directors at Insperity’s 2016 annual meeting of stockholders. Let us remind you that Mr. Smith’s activist firm reached an agreement with the company in March 2015 pursuant to which three directors recommended by Starboard were appointed to the Board. The SEC filing also said that Starboard believes the provider of human resources (HR) and business solutions “has made progress over the past year, but that the Issuer [Insperity] remains undervalued and that additional opportunities remain to improve the Issuer’s operations and corporate governance”. Mr. Smith and his team intend to continue engaging with the company’s Board and management to arrive at “a mutually agreeable resolution that would avoid the need for an election contest at the 2016 Annual Meeting”. The company has rejected the activist firm’s settlement proposals so far, while Insperity’s counterproposals were considered to be inadequate by Starboard. Some investors have previously voiced their concerns over the company’s corporate governance, saying that it had been managed like a private business until Starboard Value got involved.

The human-resources services provider registered revenue of $2.60 billion in 2015, which represented an increase from $2.36 billion in 2014 and $2.26 billion in 2013. The company’s net income for 2015 reached $39.4 million or $1.58 per diluted share, up from $28.0 million or $1.05 per diluted share in 2014. Shares of Insperity are up by 6% year-to-date and trade at a forward P/E multiple of 13.7, which is below the ratio of 16.7 for the S&P 500 Index. A total of 25 hedge funds in our system were invested in the company at the end of 2015, amassing 26% of its total shares. Bruce Salamon’s Elberon Capital held a stake of 445,500 shares of Insperity Inc. (NYSE:NSP) at the end of December, a position was the fund’s most valuable.

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The next two pages of this article digest three separate SEC filings submitted by Starboard Value and other funds monitored by our team.

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