A Look Into Jeff Smith, John Paulson & Two Other Investors’ Latest Moves

The hedge fund industry recovered some losses incurred in the first two months of 2016 during March, which marked one of the best months for the industry in two years. Approximately 70% of the global hedge fund industry posted gains in March, with the average hedge fund gaining 2.3%. The somewhat promising performance was mostly driven by long-short equity and event driven strategies, thanks to the strong rally in equities on a global basis. However, the smart money industry has yet to prove that it deserves the hefty 2-and-20 fee structure. Leaving this discussion aside, the following article will examine four informative SEC filings submitted by several hedge funds tracked by Insider Monkey at the end of the previous week.

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).

In a proxy statement filed with the SEC on Friday, Jeffrey Smith’s Starboard Value L.P. disclosed a letter sent to Depomed Inc. (NASDAQ:DEPO)’s President and Chief Executive Officer Jim Schoeneck and the company’s Board, which says that Depomed is “deeply undervalued” and that there are major opportunities to create shareholder value. Let us remind you that the New York-based hedge fund disclosed economic exposure to 5.97 million shares (4.14 million shares of common stock, as well as additional exposure in the form of cash-settled total return swap agreements) of the specialty pharmaceutical company last week, representing 9.8% of the company’s total number of outstanding shares.

The letter revealed that Mr. Smith and his team have major concerns over “serious corporate governance deficiencies, questionable capital allocation decisions, and egregious actions taken by the Board to stymie strategic interest in acquiring Depomed”. Mr. Smith’s Starboard primarily discussed two broad topics in the letter: the Board’s proposal to change Depomed Inc. (NASDAQ:DEPO)’s state of incorporation from California to Delaware, which is said to suppress shareholders’ rights; and the “shareholder-unfriendly steps” undertaken to hamper Horizon Pharma PLC (NASDAQ:HZNP)’s efforts to acquire the company. In July 2015, Depomed received an unsolicited offer from Horizon to acquire the former in an all-stock transaction for $29.25 per share, which denoted a 42% premium at the time, but Depomed’s Board adopted bylaw amendments and implemented a poison pill “designed to make it as difficult and time-consuming as possible for shareholders to potentially have a say on Horizon’s offer at a special meeting”. Long story short, Starboard Value believes that there are opportunities to unlock or create shareholder value at Depomed, some of which would require to improve capital deployment, rationalize research and development, as well as explore a possible sale of the company given possible operating, financial, and tax synergies. All in all, the New York-based activist hedge fund anticipates that Depomed’s management and Board will “halt their pattern of aggressive entrenchment behavior and take no action to further frustrate shareholders’ rights”. Last but not least, Starboard recommends the company not to pursue any acquisitions considering its levered capital structure and expensive debt. The hedge fund sentiment towards Depomed dropped notably during the December quarter, with the number of funds (among those we follow) invested in the company shrinking to 23 from 32 quarter-on-quarter. Richard Mashaal’s Rima Senvest Management owns 4.13 million shares of Depomed Inc. (NASDAQ:DEPO) as of December 31.

The upcoming pages of this article will discuss three separate filings submitted with the SEC.

According to a Form 4 filing, John Paulson’s Paulson & Co. sold 2.56 million shares of NovaGold Resources Inc. (USA) (NYSEMKT:NG) from Wednesday through Friday at a weighted average price of $5.41. Following the recent sales, Paulson & Co. continues to hold 32.95 million shares that make up 10.31% of the company’s common stock. NovaGold Resources focuses on the exploration and development of gold and copper mineral properties, but does not have any operations or realized revenues from its planned business purpose just yet. The company’s main assets consist of a 50% interest in the Donlin Gold project in Alaska, as well as a 50% interest in the Galore Creek project in British Columbia, Canada. NovaGold’s current operations mainly involve the delivery of project milestones, which include receiving various technical, environmental, sustainable development, economic and legal objectives, obtaining permits, completion of feasibility studies, among other things. The company anticipates to spend roughly $25 million throughout 2016, of which $10 million will be used to fund the company’s share of expenditures at the Donlin Gold and Galore Creek projects and $12 million for general and administrative costs. NovaGold Resources Inc. (USA) (NYSEMKT:NG)’s shares have advanced 76% in the past 12 months and are 44% in the green year-to-date. The number of ‘hedgies’ tracked by Insider Monkey with stakes in NovaGold declined to 15 from 17 during the October-December quarter; those 15 funds amassed nearly 23% of the company’s outstanding common stock. Steadfast Capital Management, run by Robert Pitts, reported ownership of 7.64 million shares in NovaGold Resources Inc. (USA) (NYSEMKT:NG) through its 13F for the final quarter of 2015.

In a freshly-amended 13G filing, Seth Klarman’s Baupost Group LLC reported owning 8.65 million shares of Bellatrix Exploration Ltd (NYSE:BXE), which constitute 4.51% of the company’s overall number of outstanding shares. This represents a decrease from the stake of 23.99 million shares disclosed in Baupost’s 13F filing for the December quarter. As a result, Mr. Klarman’s hedge fund has ceased to be the beneficial owner of more than 5% of Bellatrix’s shares. Bellatrix Exploration Ltd (NYSE:BXE) is a Western Canadian-based growth-oriented oil and gas company that engages in the exploration, acquisition, development and production of oil and natural gas reserves in the provinces of Alberta, British Columbia and Saskatchewan. The company’s total revenue for 2015 was $333.32 million, down from $583.47 million generated in 2014. The decrease in the company’s light oil, condensate, natural gas, and NGL revenues was mainly driven by the decrease in average commodity prices in 2015 as compared to 2014, partly offset by higher sales volumes. Bellatrix’s 2015 sales volumes increased 9% year-on-year to an average of 41,441 barrels of oil equivalent per day, mainly due to ongoing successful drilling activity in the Spirit River resource plays, as well as proactive management of firm service agreements. The oil and gas company has a net capital budget of less than $46 million for the first half of 2016, which represents a 42% reduction on an annualized basis relative to the 2015 capital spending. Even so, Bellatrix anticipates to maintain production at roughly 39,000 barrels of oil equivalent per day despite the massive reduction in capital expenditures. Shares of Bellatrix are down 62% in the past 12 months after dropping 16% year-to-date, whereas the entire independent oil and gas industry has gained 5.7% year-to-date. There were 10 money managers among those we track with stakes in Bellatrix, who stockpiled roughly 33% of the company’s shares. Daniel Lewis’ Orange Capital had 32.73 million shares of Bellatrix Exploration Ltd (NYSE:BXE) in its equity portfolio at the end of 2015.

As revealed in a separate 13G filing, Brian Taylor’s Pine River Capital Management L.P. currently owns 2.52 million shares of JAKKS Pacific Inc. (NASDAQ:JAKK), which account for 11.0% of the company’s outstanding shares. This represents an increase from the stake of 1.65 million shares disclosed in the fund’s previous 13G filing on the company, submitted with the SEC in early February. The shares of the multi-line toy company have declined almost 8% since the beginning of 2016, so Mr. Taylor and his team might have decided not to pass up the opportunity of buying more shares at more attractive prices. JAKKS Pacific Inc. (NASDAQ:JAKK) designs, produces, markets and distributes toys and other related products through its in-house sales staff and independent sales representatives to toy and mass-market retail chain stores, departments stores, and others. The company’s three largest customers are represented by Wal-Mart Stores Inc. (NYSE:WMT), Target Corporation (NYSE:TGT) and Toys ‘R’ Us, which accounted for 21.9%, 13.0% and 9.5% of 2015 net sales. JAKKS Pacific’s net sales for 2015 totaled $745.74 million, which decreased from $810.06 million in 2014. The decrease in the company’s 2015 top-line figure was mainly attributable to the strong performance of the Frozen and Marvel brands in 2014. Even so, net income increased to $23.17 million in 2015 from $21.51 million in 2014. Shares of JAKKS Pacific currently change hands at around 8.5-times expected earnings, versus the forward P/E multiple of 17.4 for the S&P 500 Index or the ratio of 18.5 for the Nasdaq-100 Index. A total of 13 hedge funds from our database had long positions in the toy company at the end of December, accumulating 13% of its outstanding shares. Billionaire Jim Simons’ Renaissance Technologies had a 1.82 million-share position in JAKKS Pacific Inc. (NASDAQ:JAKK) in its equity portfolio at the end of 2015.

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