Barry Rosenstein of JANA Partners is one of the most visible activist investors in the U.S, one who targets both small and large-cap companies. JANA Partners has been filing 13Fs since 2003 and disclosing its long positions in US securities that are traded in major US exchanges. In recent articles we have discussed JANA Partners’ top small-cap stock picks, as well as its top mid-cap picks, the latter of which beat the S&P 500 Total Return Index by an average of 130 basis points per month between 2003 and 2012. In this article we will focus on JANA’s large-cap stock picks.
Let us explain why it is important to conduct performance analysis and ride the coattails of activist hedge funds like JAA Partners. Rosenstein’s investors achieved annualized returns of around 17% assuming that they have been investing with Rosenstein since day 1. As we mentioned above, outside investors who simply buy JANA’s top mid-cap stocks actually did much better than JANA’s paying investors who enjoyed those 17% annualized returns. The reason is simple: a hedge fund’s returns are higher in the early years of its operation mainly due to survivorship bias. Also as a hedge fund attracts more capital and gets bigger, it starts to invest in more large-cap stocks because it can’t invest all of its new capital in smaller stocks for liquidity and diversification reasons. Our analysis showed that JANA Partners’ top 5 large-cap stock picks returned an average of 0.35% per month between 2003 and 2012. These stocks underperformed the S&P 500 Total Return Index by an average of 30 basis points per month during this ten year period. Piggyback investors don’t have to invest in every stock pick of a hedge fund. Theoretically we know that hedge funds’ large-cap stock picks don’t generate much alpha. Investors then can achieve much higher returns by avoiding hedge funds’ large-cap picks (read the details here), as the case of JANA Partners demonstrates. It is worth noting that the five large-cap stocks discussed in this article alone represent 29.5% of JANA Partners’ entire public equity portfolio.
Given JANA’s poor track record of picking large-cap stocks, investors may be better off avoiding at least some of these names. JANA Partners does, like many other hedge funds, keep a number of positions in large-cap companies. Among them, we find activist positions in Walgreens Boots Alliance Inc (NASDAQ:WBA) of 13.75 million shares and in QUALCOMM, Inc. (NASDAQ:QCOM) of 28.54 million shares, these long positions being the fund’s largest.
JANA Partners increased its stake in the California-based multinational e-commerce website eBay Inc (NASDAQ:EBAY) by 49% during the first quarter, lifting its total stake to 20.00 million shares valued at $1.15 billion. eBay Inc (NASDAQ:EBAY) has returned 11.9% year-to-date and reached its all-time high share price at the end of May, trading at $63.03. Last fall, eBay announced that it was planning to divest its PayPal, which is expected to be done during the third quarter of this year according to Merrill Lynch analysts. Given that, Merrill Lynch has also stepped back from its earlier target price for eBay, expecting the company’s shares to decline after the PayPal spin-off. Other large shareholders in eBay Inc (NASDAQ:EBAY) are Carl Icahn‘s Icahn Capital, who pushed for the PayPal divesture, and Orbis Investment Management.
During the first quarter JANA Partners sold off 6% of its stake in the Irish-headquartered pharmaceutical giant Actavis PLC (NYSE:ACT), leaving it with a stake of 1.62 million shares with a market value of $482.70 million. Actavis has returned a strong 20% this year despite legal problems it is facing related to its Alzheimer’s drug-switching, which has been accused of violating anti-trust laws. Nonetheless, J.P Morgan states that there is still upside of 25% in the company’s shares over the next year. This should be driven in part by the strong position Actavis PLC (NYSE:ACT) has in generics, especially after the acquisition of Auden Mckenzie Holdings Limited. With this acquisition Actavis will maintain the number one position in the U.K market for generic healthcare while being third in other branded pharmaceutical products. Other large stakeholders in Actavis PLC (NYSE:ACT) among the funds we track are Andreas Halvorsen‘s Viking Global, and Paulson & Co.
JANA Partners has also decreased its stake in Montreal-based Valeant Pharmaceuticals Intl Inc (NYSE:VRX) by 64% to a total of 1.57 million shares with a value of $312.12 million. Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has had a great 2015 thus far, returning a robust 66%, the highest in both the S&P and Canadian TSX. Currenty the second-largest company in Canada in terms of market capitalization behind only Royal Bank of Canada (NYSE:RY), Valeant is aiming to grow even larger, a task that can be accomplished through acquisitions, according to analysts. A possible takeover candidate for the Canadian pharmaceutical giant is Egyptian company Amoun Pharmaceutical Co. Valeant is also planning an expansion into Asia which could greatly push its growth. Bill Ackman’s Pershing Square, and the quant fund D E Shaw are among the top shareholders of Valeant Pharmaceuticals Intl Inc (NYSE:VRX).
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