Billionaire Activist Tom Sandell Targets These Stocks For Q4

Sandell Asset Management is a New York-based, event-driven, multi-strategy investment firm founded by Swedish investment banker and billionaire Tom Sandell in 1998. Although the firm started out with passive investing, in recent years it has gone activist on several companies in its portfolio. Mr. Sandell holds an MBA, and prior to founding Sandell Asset Management, worked at erstwhile investment banking giant Bear Stearns for ten years. Sandell Asset Management recently submitted its 13F with the SEC for the reporting quarter ending September 30. According to the filing, the fund’s U.S equity portfolio at the end of September was worth $644.71 million, a significant decline from the $942.48 million that it was worth at the end of June. The filing also revealed that Sandell Asset Management had an unusually high quarter-over-quarter turnover of 100% in its portfolio during the third quarter and that the fund’s top ten equity holdings accounted for almost 70% of the value of its equity portfolio at the end of September. In this article we are going to focus on Sandell Asset Management’s top five stock picks going into the fourth quarter.

We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

#5 QUALCOMM, Inc. (NASDAQ:QCOM)

 – Shares Owned by Sandell Asset Management (as of September 30): 346,520 shares

 – Value of Holding (as of September 30): $18.62 Million

Let’s start with QUALCOMM, Inc. (NASDAQ:QCOM), which made its debut in Sandell Asset Management’s portfolio in the fifth spot, with the fund having initiated a stake in the company in the third quarter. After declining gradually throughout the year, the stock of the chipmaker slumped by more than 15% the day after it announced its fiscal year 2015 fourth quarter results on November 4. Currently QUALCOMM, Inc. (NASDAQ:QCOM)’s stock trades down by more than 33% year-to-date. Although the firm’s EPS of $0.91 on revenue of $5.50 billion was better than analysts’ expectations of EPS of $0.86 on revenue of $5.26 billion, it was worse than the EPS of $1.21 and revenue of $6.00 billion that the company had reported for the same quarter last year. Moreover, the company’s decision to not offer forward guidance starting from this quarter also weighed heavily on the stock. Among other hedge funds that initiated a stake in the company during the third quarter was Richard S. Pzena‘s Pzena Investment Management; it held 879,185 shares of  QUALCOMM, Inc., as of September 30.

#4 Viavi Solutions Inc (NASDAQ:VIAV)

 – Shares Owned by Sandell Asset Management (as of September 30): 5.07 Million

 – Value of Holding (as of September 30): $27.23 Million

Viavi Solutions Inc (NASDAQ:VIAV) was also a new addition in Sandell Asset Management’s portfolio during the third quarter. Apart from acquiring 5.07 million shares, the fund also purchased Call options underlying 5.24 million shares of the company during the third quarter. Two important things that must be highlighted are that Viavi Solutions Inc (NASDAQ:VIAV) was earlier known as JDS Uniphase Corporation and that it became a separate trading entity only after JDS Uniphase Corporation completed the spinoff of Lumentum Holdings Inc (NASDAQ:LITE) in August of this year. At the end of June, Sandell Asset Management owned over 3.0 million shares of JDS Uniphase Corporation. On November 2, Viavi Solutions Inc declared its fiscal year 2016 first quarter numbers, reporting EPS of $0.08 on revenue of $229.7 million versus analysts’ expectations of EPS of $0.06 on revenue of $212.71 million. Anand Parekh‘s Alyeska Investment Group acquired over 5.5 million shares of Viavi Solutions Inc during the third quarter.

#3 Ethan Allen Interiors Inc. (NYSE:ETH)

 – Shares Owned by Sandell Asset Management (as of September 30): 1.37 Million

 – Value of Holding (as of September 30): $36.18 Million

Moving on, Ethan Allen Interiors Inc. (NYSE:ETH) is one of the company on which Sandell Asset Management has gone activist in recent months, hence it’s no surprise that after increasing its stake by 111% during the second quarter, the fund yet again increased its stake in the company, by 49% during the third quarter. In August, Sandell Asset Management sent a letter to the Board of Directors of Ethan Allen Interiors Inc. (NYSE:ETH) voicing its dissatisfaction over the company not engaging in discussions with the fund regarding the appointment of new Directors to the company’s Board. When Ethan Allen Interiors Inc. failed to engage with the fund even after receiving the letter, Sandell launched a proxy fight against the company. The verdict of this proxy fight will be delivered on November 24 at Ethan Allen’s Annual Meeting, where shareholders will vote for or against the six Directors nominated by Sandell Asset Management for Ethan Allen’s seven-member Board. Paul Hondros‘ AlphaOne Capital Partners was one of the hedge funds that initiated a stake in Ethan Allen Interiors Inc. during the third quarter; it held 126,793 shares of the company as of September 30.

#2 Brookdale Senior Living, Inc. (NYSE:BKD)

 – Shares Owned by Sandell Asset Management (as of September 30): 2.23 Million

 – Value of Holding (as of September 30): $51.1 Million

Owing mostly to the massive 33.8% decline shares of Brookdale Senior Living, Inc. (NYSE:BKD) suffered during the third quarter, they are currently trading down by 38.3% year-to-date. Brookdale Senior Living, Inc. (NYSE:BKD) is another company in which Sandell Asset Management has been pushing for reforms and that is likely why even after such a massive slump in the company’s stock price, Sandell sold just 7,500 shares of it during the third quarter. Unlike the management of Ethan Allen Interiors Inc., the management of Brookdale Senior Living, Inc. seems to be listening to Sandell Asset Management, because in June the company appointed two new Directors to its Board which were approved by the fund. However, it hasn’t yet shown signs of taking Sandell Asset Management’s advice to spin off its real estate assets into a Real Estate Investment Trust (REIT). For the third quarter, Brookdale Senior Living, Inc. (NYSE:BKD) reported a per share loss of $0.37 on revenue of $1.24 billion, compared to a per share loss of $0.23 on revenue of $1.08 billion it reported for the same quarter of last year. With ownership of over 17.64 million shares of the company, Larry Robbins‘ Glenview Capital was its largest shareholder at the end of September among the hedge funds covered by Insider Monkey.

#1 Bob Evans Farms Inc (NASDAQ:BOBE)

 – Shares Owned by Sandell Asset Management (as of September 30): 1.62 Million

 – Value of Holding (as of September 30): $70.26 Million

Finally, even after disposing of 15% of its shares of Bob Evans Farms Inc (NASDAQ:BOBE) during the third quarter, the company remained Sandell Asset Management’s top stock pick at the end of that period. Shares of Bob Evans Farms Inc (NASDAQ:BOBE) haven’t been able to recover from the massive slump they experienced in March after the company reported its fiscal year 2015 third quarter results and currently trade down by 21% year-to-date. On November 17, the company named restaurant-industry veteran Saed Mohseni as its new CEO. Interestingly, Bob Evans Farms Inc’s previous CEO, Steve Davis, resigned under pressure last December after nominees of Sandell Asset Management won four of the 12 Board seats of the company in August. On October 16, analysts at Oppenheimer reiterated their ‘Buy’ rating on the stock. Chuck Royce‘s Royce & Associates was another firm that reduced its stake in Bob Evans Farms Inc during the third quarter, owning 281,773 shares of the company as of September 30.

Disclosure: None