Jeffrey Smith’s Starboard Value LP had a solid first quarter, with its 16 long positions in stocks with a market cap above $1.0 billion delivering weighted average returns of 6.4% during this period. While most of its investments paid off, some of the hedge fund’s picks had a strong negative impact on overall returns. In this article we will take a closer look at Yahoo! Inc. (NASDAQ:YHOO), Staples, Inc. (NASDAQ:SPLS), Alibaba Group Holding Ltd (NYSE:BABA), and AOL, Inc. (NYSE:AOL), which were among Starboard Value’s worst picks in Q1.
Starboard Value is an activist hedge fund that was founded in 2002 by Jeffrey Smith. The firm employs a fundamental oriented approach and focuses primarily on small-cap stocks. Furthermore, the New York-based investment firm favors undervalued companies and seeks to actively engage with management in order to identify opportunities to unlock further shareholder value.
Yahoo! Inc. (NASDAQ:YHOO) was one of Starboard Value’s top picks at the start of the first quarter, with a holding of 7.72 million shares valued at around $390 million. The hedge fund entered a new position in the company during the third quarter of 2014. Mr. Smith’s firm hoped management would take steps to increase shareholder value by spinning off Yahoo! Inc. (NASDAQ:YHOO)’s stake in Yahoo! Japan and/or considering a merger with AOL, Inc. (NYSE:AOL). However, so far this year, Starboard Value was unable to profit from its stake in this stock, which lost 12.02% during the first quarter.
Staples, Inc. (NASDAQ:SPLS) also performed poorly last quarter, as shares dropped 9.45%. This was bad news for Starboard Value, as it had increased its stake in the company to 31.46 million shares in February. Hence, the hedge fund is currently one of Staples, Inc. (NASDAQ:SPLS)’s largest shareholders among institutional investors. Mr. Smith’s firm remains confident the stock will deliver solid returns in the future, especially once post-merger synergies from its acquisition of Office Depot Inc (NASDAQ:ODP) kick in. Richard S. Pzena’s Pzena Investment Management is also betting on the company, disclosing a position of 25.45 million shares in its latest 13F filing.
Starboard Value also entered a new position in Alibaba Group Holding Ltd (NYSE:BABA) during the fourth quarter, which amounted to 400,000 shares, valued at roughly $41.58 million. Despite the hedge fund’s bullish stance, the stock lost 19.92% in the first three months of 2015 and is currently trading at $81.86 per share. Despite its poor performance, numerous investment firms boast a stake in Alibaba Group Holding Ltd (NYSE:BABA), including Dan Loeb’s Third Point and Rob Citrone’s Discovery Capital Management.
Lastly, AOL, Inc. (NYSE:AOL) was also among Starboard Value’s worst-performing picks, as the stock lost 14.21% during the first quarter. The hedge fund’s stake in the company amounts to 225,000 shares, which were valued at around $10.4 million at the beginning of the year. As mentioned above, Starboard Value had been pushing Yahoo! and AOL towards a merger, which it felt would increase the value of its holdings in both companies. However Smith and Starboard have since backed off in their quest to have the two internet pioneers merge. In contrast to the small stake in AOL, Inc. (NYSE:AOL) held by Mr. Smith’s firm, David Cohen and Harold Levy’s Iridian Asset Management own 5.07 million shares of the company’s stock.
Tracking the activity of hedge funds such as Starboard Value is vital when trying to seek out new investment opportunities for small investors. However, simply imitating the moves made by these firms does not guarantee great returns, since most of their top picks are in large-cap stocks. These equities usually don’t beat the market by a large margin, as they are usually more efficiently priced. Hence, here at Insider Monkey, we concentrate our efforts on gathering and analyzing information regarding the small-cap picks of more than 700 hedge funds. As a result we have devised a small-cap strategy that returned over 137% over the past 2.5 years, and beat the S&P 500 ETF (SPY) by more than 80 percentage points.