Activist Jeff Smith’s Five Favorite Stock Picks

For almost a decade and a half, Jeffrey Smith‘s billion dollar activist hedge fund, Starboard Value, has struck fear in the management suite of his targets. Smith is willing to do whatever it takes, including fighting with entrenched management in proxy fights, to unlock value for shareholders. Seeing as Starboard Value’s annual return has averaged around 16% since 2002, Smith has done an admirable job unlocking value for his fund holders and for the shareholders of his target companies. Given that Starboard Value recently filed its 13F for the first quarter, let’s take a closer look at the fund’s top picks of Yahoo! Inc. (NASDAQ:YHOO), Darden Restaurants, Inc. (NYSE:DRI), Advance Auto Parts, Inc. (NYSE:AAP), Marvell Technology Group Ltd. (NASDAQ:MRVL), and WestRock Co (NYSE:WRK).

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#5 WestRock Co (NYSE:WRK)

Shares held (as of March 31): 4.57 million

Total Value (as of March 31): $178.22 million

Percent of Portfolio (as of March 31): 6.27%

Starboard raised its stake in WestRock Co (NYSE:WRK) by 2% to 4.57 million shares during the first quarter. That translates to a stake of $178.2 million, worth 6.26% of Starboard’s equity portfolio. WestRock reported strong fiscal second quarter earnings of $0.61 per share on revenue of $3.7 billion in April. The company delivered solid operating results in its consumer and corrugated packaging segment and realized $350 million in run-rate synergies from the combination between Rock-Tenn Company and MeadWestvaco Corporation in 2015. Although shares of WestRock have rallied since February, the stock is arguably still cheap with a forward P/E of 13.6.

#4 Marvell Technology Group Ltd. (NASDAQ:MRVL)

Shares held (as of March 31): 20.4 million

Total Value (as of March 31): $210.3 million

Percent of Portfolio (as of March 31): 7.39%

Marvell Technology Group Ltd. (NASDAQ:MRVL) was a new position for Starboard in the first quarter. Smith’s fund bought 20.4 million shares, worth $210.3 million, which accounted for 7.39% of the equity portfolio at the end of March. On the account of increased industry oversupply, the company has faced some top-line pressures and had to restructure its mobile chip division to improve earnings. Because of the poor performance, the company’s founder and CEO, Sehat Sutardja resigned in early April, and later that month, Marvell entered into an agreement with Starboard Value LP, under the terms of which the hedge fund got to add four representatives to the company’s board of directors. Starboard will most likely push for major cost cuts or strategic initiatives to unlock shareholder value. Cliff Asness’ AQR Capital Management is another major shareholder of Marvell Technology.

#3 Advance Auto Parts, Inc. (NYSE:AAP)

Shares held (as of March 31): 1.71 million

Total Value (as of March 31): $273.76 million

Percent of Portfolio (as of March 31): 9.62%

Although Starboard kept its stake in Advance Auto Parts unchanged at 1.7 million shares, the position accounted for 9.62% of the fund’s portfolio, worth $273.8 million at the end of March. Starboard has a big position in the stock because the fund believes Advance Auto Parts, Inc. (NYSE:AAP) is substantially undervalued due to the fact that it isn’t run as well as it should. Starboard notes that similar competitors Autozone, Inc. (NYSE:AZO) and O’Reilly Automotive Inc (NASDAQ:ORLY) have operating margins of around 20% while Advance Auto Parts has operating margins of 10-12%. The fund believes Advance Auto Parts’ operating margins could be just as high as its competitors if management’s execution improves, non-core assets are monetized, and some working capital comes out of the business. In early April, Advance Auto Parts took a big step to improve its management structure by naming Thomas Greco as CEO. Mr. Greco was previously the CEO of Frito-Lay North America. Investors hope Greco can lift Advance Auto Parts, Inc. (NYSE:AAP)’s operating margins closer to its peers.

#2 Darden Restaurants, Inc. (NYSE:DRI)

Shares held (as of March 31): 6.62 million

Total Value (as of March 31): $438.58 million

Percent of Portfolio (as of March 31): 15.42%

Starboard took profits in Darden Restaurants, Inc. (NYSE:DRI) in the first quarter after successfully unlocking value in the stock. The fund cut its stake by 44% to 6.62 million shares, worth $438.6 million at the end of March. Although the fund reduced its exposure to the company, Darden nevertheless accounted for 15.41% of Starboard’s equity portfolio at the time. On the account of the strong economy and low fuel prices, Darden shares have performed reasonably well, up by 5.5% year-to-date. The company reported fiscal third quarter earnings that beat both top- and bottom-line estimates, and still trades for a cheap 16.6 times forward earnings. The stock also pays an attractive 3% dividend yield. Given the attractive dividend yield, the strong economy, and the cheap forward P/E, many funds still think Darden has considerable upside left.

#1 Yahoo! Inc. (NASDAQ:YHOO)

Shares held (as of March 31): 12.3 million

Total Value (as of March 31): $452.71 million

Percent of Portfolio (as of March 31): 15.91%

Given the quality of its assets and the poor performance of its operations, it’s not surprising that Yahoo is Starboard’s top holding. According to the latest SEC filings, Starboard raised its stake in Yahoo by 74% to 12.3 million shares, worth $452.7 million at the end of March. The over $450 million position accounted for 15.9% of Starboard’s portfolio. Partly on Starboard’s behest, Yahoo! Inc. (NASDAQ:YHOO) is considering selling its core operations to various companies while keeping its Alibaba Group Holding Ltd (NYSE:BABA) stake. Analysts estimate the sale could bring in as much as $4-$8 billion. If the final realized number is higher than market expectations and management decides to use the money to buy back stock, Yahoo shares might rally. Whatever happens, Starboard will likely play a part in the final decision process. Starboard will have four directors on Yahoo’s board in the near future.

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