Below we present the list of 4 Stocks Billionaire Barry Rosenstein Loves (And 1 He’s Given Up On). For our methodology and a more comprehensive list please see 8 Stocks Billionaire Barry Rosenstein Loves (And 2 He’s Given Up On).
5. Encompass Health Corporation (NYSE:EHC)
Value of JANA Partners‘ 13F Position: $189 million
Number of Hedge Fund Shareholders (as of March 31): 48
Kicking off the second part of our list is Encompass Health Corporation (NYSE:EHC). Rosenstein trimmed his position in the healthcare provider by 3% during Q1, holding a stake of nearly 2.83 million shares. There was an overall 20% surge in hedge fund ownership of EHC during Q1, with the stock reaching a record level of interest among money managers.
JANA owns about 2% of Encompass Health Corporation (NYSE:EHC)’s shares and has pushed the company to consider strategic alternatives for its home health and hospice segment. The company announced in December 2021 that it would spin off the unit, while JANA continued to advocate for a merger, pushing the company to reengage with potential suitors. The spinoff is expected to close on July 1.
The Heartland Mid Cap Value Fund remains committed to the long-term potential of Encompass Health Corporation (NYSE:EHC), but discussed some of the issues that have plagued the company in recent quarters in its Q4 2021 investor letter:
“COVID complications. Shares of many Health Care companies lagged as the continuing threat of COVID-19 dampened demand for elective medical procedures and health care providers struggled to maintain adequate staffing in the face of burnout and resistance to vaccine mandates. The Strategy’s holdings in the sector trailed the benchmark average, and the group contained a key detractor, Encompass Health Corporation (EHC).
Encompass provides inpatient rehabilitation services as well as home-based health and hospice care. Both businesses enjoy a competitive advantage over many of their peers and, we believe, are well positioned to grow organically, and acquire smaller competitors that could further economies of scale.
A labor shortage has taken a toll on sales and profit margins at Encompass as the company struggles to fill positions in a challenging environment for nursing wages and availability. Revenues have also been hurt by a slowdown in elective surgeries performed, which results in a smaller pool of patients in need of rehabilitation services.
When we took a stake in Encompass late in the summer of 2020, we recognized that COVID-related headwinds could endure longer than anticipated. However, the team believes the current challenges will eventually fade as enhanced nurse recruiting outreach helps mitigate staffing pressures while COVID-19 containment and treatment efforts gain traction. With shares producing an 8% free cash flow yield and trading at just 9x 2022 enterprise value/earnings before interest, taxes, depreciation, and amortization, we believe our patience will be rewarded.”
4. Mercury Systems, Inc. (NASDAQ:MRCY)
Value of JANA Partners‘ 13F Position: $209 million
Number of Hedge Fund Shareholders (as of March 31): 18
Rosenstein trimmed his Mercury Systems, Inc. (NASDAQ:MRCY)’s position by 10% during Q1, to 3.24 million shares after building a much larger stake in the defense contractor during Q4. Hedge fund ownership of MRCY has been extremely volatile over the past few years, with the number of funds long the stock dipping to as few as 6 at the end of 2018, from as many as 26 in the middle of 2020.
Mercury Systems, Inc. (NASDAQ:MRCY) is another stock that both JANA Partners and Starboard Value have taken an activist interest in recently. JANA began pushing the company to consider selling itself last December, and had teamed up with several potential director candidates. During Q1, Starboard took a new, slightly larger stake in MRCY than the one JANA owns and began pushing for operational changes at the company, including potentially slashing the company’s R&D budget.
Baron Small Cap Fund likes the presence of activists like Rosenstein and Jeffrey Smith in the stock, noting that it indicates the stock has untapped value. The fund had this to say about Mercury Systems, Inc. (NASDAQ:MRCY) in its Q1 2022 investor letter:
“Mercury Systems, Inc. (NASDAQ:MRCY), a leading Tier 2 defense electronics contractor, bounced back, along with the broader defense industry, after the Russian invasion of Ukraine and a larger-than-expected U.S. defense budget for fiscal 2023. As Mercury is involved in all the key priorities of the current U.S. defense strategy, we believe that growth will accelerate in the future. Mercury has been struggling with program delays and supply-chain issues for much of the last year, and the stock has been under pressure for some time. Activists bought stakes recently, which we view as an indication of value in the stock. We are hopeful that the company will revert to its historic growth algorithm or high single-digit organic revenue growth, faster profit growth, and strategic and accretive acquisitions, which would drive much higher EBITDA and a higher valuation, in line with past norms.”
3. Conagra Brands, Inc. (NYSE:CAG)
Value of JANA Partners‘ 13F Position: $270 million
Number of Hedge Fund Shareholders (as of March 31): 22
Conagra Brands, Inc. (NYSE:CAG) had been Barry Rosenstein’s top stock pick for over three years, dating all the way back to mid-2018 when Pinnacle Foods, which was later acquired by Conagra, topped his portfolio. Following the acquisition, Rosenstein remained a Conagra shareholder and despite selling over 5 million shares since then, the stock was his top pick through the end of 2021.
Rosenstein left his fund’s position in Conagra Brands, Inc. (NYSE:CAG) unchanged during Q1, during which time it lost its lead atop said portfolio to Zendesk. Just 22 hedge funds were long Conagra on March 31, down from 55 in late 2016. Among those fund managers selling off the stock during Q1 were Mike Vranos of Ellington and Paul Tudor Jones of Tudor Investment Corp.
Conagra Brands, Inc. (NYSE:CAG) grew its organic net sales by 6% during Q3 of its fiscal year 2022, but experienced margin compression due to some of its strategic investments. Conagra’s frozen and snacks segments have been strong drivers of the company’s growth and are where Conagra will focus its price hikes as it tries to combat inflation. The company believes those segments not only have strong demand, but also limited private label competition.
2. Zendesk Inc (NYSE:ZEN)
Value of JANA Partners‘ 13F Position: $373 million
Number of Hedge Fund Shareholders (as of March 31): 66
Zendesk Inc (NYSE:ZEN) is Barry Rosenstein’s top pick after the activist money manager raised his stake in the customer service platform by 30% during Q1. Other hedge funds also liked what they saw from ZEN in Q1, as there was a 16% quarter-over-quarter increase in the number of funds long ZEN.
Zendesk Inc (NYSE:ZEN) and JANA have not always been on the best of terms, engaging in a lengthy public dispute that saw JANA criticize the firm and its leadership on multiple occasions. Rosenstein was highly critical of Zendesk’s attempted acquisition of Momentiv, calling it “ill-conceived and value destructive”. Other shareholders agreed with JANA, as they voted against the acquisition in overwhelming numbers.
JANA sought to remake Zendesk Inc (NYSE:ZEN)’s leadership team, or if that failed, believed the company should at least be sold. When Zendesk was unable to find a suitor earlier this month, the company admitted defeat and entered into settlement talks with JANA. CEO Mikkel Svane could be on the chopping block according to reports. Removing board member Carl Bass is another potential goal of JANA’s that is reportedly being pursued.
1. Macy’s, Inc. (NYSE:M)
Former Value of JANA Partners‘ 13F Position: $19.92 million
Number of Hedge Fund Shareholders (as of March 31): 42
Closing out the list is the other stock Rosenstein gave up on during Q1, Macy’s, Inc. (NYSE:M). Rosenstein began unloading the position in Q4, just one quarter after taking a new stake in the iconic department store chain. He unloaded 84% of his position in Q4 and sold off the remaining 760,780 shares in the first quarter.
Shortly after amassing a position of over 4 million shares, Rosenstein urged Macy’s, Inc. (NYSE:M) to follow Saks’ lead and spin off its e-commerce business, suggesting the company’s stock price could double if it did. Following consultations with Alix Partners, the same firm that advised on the aforementioned deal, Macy’s decided in February that it makes more sense for it to remain a fully integrated company. It appears that caused Rosenstein to head for the exits.
Macy’s, Inc. (NYSE:M)’s latest quarterly results do suggest the company is building positive momentum. Macy’s grew sales by 13.6% in the first quarter, hitting $5.35 billion, and has successfully expanded its gross margin by 1.4 percentage points over the last three years, reaching 39.6% on that front in the first quarter. Maintaining a tighter inventory has allowed Macy’s to reduce the need for discounting, which has weighed on its margins in the past, which it’s accomplished without hindering the company’s sales growth.
For more on the latest trades made by some of the biggest hedge fund managers in the world, check out 10 Blue Chip Stocks to Buy According to Mario Gabelli and Bill Gates’ 2022 Portfolio: 10 Value Stock Picks.
Disclosure: None.
