Starboard Value Takes Aim at a New Activist Target, Plus All the Details on 3 Other Filings

Numerous stock market watchers may be wondering how many hedge fund vehicles are able to generate exceptional trading profits over the long-term for their investors, but it is practically impossible to comprehend each fund’s investment strategy and approach to investing. Professional investors, analysts and other stock market participants usually judge hedge funds by comparing their performance to a benchmark and it is quite evident that the hedge fund industry has lagged behind broader market benchmarks in recent years. Even so, hedge funds, particularly long term-oriented activist funds, continue to play an important role in the financial markets, with some of their activist campaigns successfully fixing troubled companies. For that reason, we will discuss four SEC filings (most of which involve activist positions) submitted by several popular hedge funds tracked by Insider Monkey.

At Insider Monkey, we track around 785 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 fresh filing with the SEC, Glenn W. Welling’s Engaged Capital LLC commented on Benchmark Electronics Inc. (NYSE:BHE)’s letter to shareholders distributed earlier this week. Engaged Capital, which owns 2.43 million shares or 4.9% of the company’s outstanding common stock, has been engaged in a proxy fight with the electronics manufacturing services company for quite a while, and is seeking the appointment of three nominees at the annual meeting of shareholders scheduled next month.

Moving on to the content of the aforementioned filing, Mr. Welling’s investment firm says that “While we found the letter [the letter to shareholders sent by Benchmark on April 6] to be long on prose, it was short on substance”. In particular, the activist hedge fund voiced its discontent with the company’s poor capital allocation, “fundamentally flawed” executive compensation approach, as well as the company’s long-term underperformance. Engaged Capital accuses Benchmark Electronics Inc. (NYSE:BHE)’s Board and management of “cherry-picking” performance measurement periods, saying that the period from the beginning of January 2012 until today, the period that the company believes is the appropriate period to judge performance, is the only annual measurement period in the last decade “from which BHE can claim they have outperformed peers”.

Engaged Capital also commented on the company’s following statement: “Shareholders have benefited substantially from our ability to increase our proportion of higher-value markets in our business mix from 32% of total revenue in 2007 to 55% in 2015.” Specifically, Mr. Welling and his team somewhat belittled the company’s statement by saying: “We do not see how BHE can claim shareholders have “benefited substantially” from long-term underperformance”. Indeed, most stock market watchers would agree that shareholders can only benefit from revenue growth or other positive business-related developments only as long as those developments lead to strong stock performance. The shares of Benchmark are down by 9% in the past 12 months, but they are 7% in the green year-to-date. There were 20 hedge fund vehicles in our system invested in the company at the end of 2015, with them having accumulated nearly 13% of its outstanding stock. Clint Carlson’s Carlson Capital reported owning approximately 523,000 shares of Benchmark Electronics Inc. (NYSE:BHE) as of December 31.

Let’s head to the next two pages of this article, where we discuss three other prominent SEC filings.