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.

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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.

According to a Schedule 13D filing, Jeffrey Smith’s Starboard Value LP owns a stake of 4.14 million shares in Depomed Inc. (NASDAQ:DEPO), which account for 6.8% of the company’s outstanding shares. However, the activist hedge fund has economic exposure to 5.97 million shares, which represent 9.8% of the company’s outstanding shares, as the fund has certain cash-settled total return swap agreements in place. More importantly, the activist filing reveals Starboard’s significant concerns regarding the company’s “serious corporate governance, deficiencies, questionable capital allocation decisions, and egregious actions” implemented by the company’s Board of Directors to hinder interest in acquiring the company, as well as subdue shareholder rights. Specifically, the New York-based hedge fund accuses the specialty pharmaceutical company of taking a “series of shareholder-unfriendly steps” to block Horizon Pharma PLC (NASDAQ:HZNP)’s attempts to acquire the company for at least $33.00 per share, a takeover offer that is significantly higher than Depomed’s current share price. Mr. Smith and his team also called into question the company’s proposal to change its state of incorporation from California to Delaware, a move that would suppress shareholders’ rights by eliminating the ability of shareholders to call a special meeting for the purpose of replacing Board members, as well as preventing shareholders from starting a special meeting request within 180 days of any annual meeting of shareholders. Starboard Value also voiced its plans to nominate a slate of director candidates in connection with its request for a special meeting of shareholders.

The shares of the specialty pharmaceutical company that focuses on pain and other central nervous system conditions have gained 13% in today’s trading session, primarily owing to the new activist campaign launched by the successful and feared activist fund. Depomed Inc. (NASDAQ:DEPO)’s management issued a rather concise statement in response to Starboard’s detailed 13D filing, which says: “Depomed welcomes open communications with its shareholders and values constructive input toward the goal of enhancing shareholder value”. The hedge fund sentiment towards Depomed declined notably in the December quarter, as the number of funds in our database with stakes in the company fell to 23 from 32 quarter-over-quarter. Richard Mashaal’s RIMA Senvest Management upped its position in Depomed Inc. (NASDAQ:DEPO) by 50% during the final quarter of 2015, ending the year with 4.13 million shares.

As revealed in a separate 13D filing, David Winters’ Wintergreen Advisers currently owns 1.54 million shares of Consolidated-Tomoka Land Co. (NYSEMKT:CTO), which constitute 26.1% of the company’s outstanding shares. While the investment firm’s stake has not undergone any changes since the fund’s previous 13D filing on the company in early January, Wintergreen Advisers reveals in the new filing how it plans to vote certain items in the company’s 2016 Definitive Proxy Statement. Wintergreen Advisers intends to vote against the re-election of the current slate of seven directors, against the appointment of Grant Thornton as auditor (as the firm’s audit fees have doubled over a two-year period), against the approval of executive compensation and against the issuance of additional shares. However, the investment firm plans to vote for the hiring of an advisor that would explore strategic alternatives to unlock shareholder value, which includes the possibility of liquidating assets or selling the entire company. Wintergreen Advisers put particular emphasis on the real estate operating company’s proposal regarding the issuance of additional shares, saying that the proposed issuance intended to meet current payment obligations to bond holders could dilute existing shares by more than 23%. Instead, Mr. Winters and his team recommends Consolidated-Tomoka Land Co. (NYSEMKT:CTO) liquidate some assets to raise the much-needed cash for deleveraging the company’s balance sheet. The shares of the diversified real estate operating company that owns and manages commercial real estate properties have plummeted by 19% in the past 52 weeks. There were 12 money managers that we track with stakes in the company on December 31, with them owning 34% of its outstanding shares. Michael Reeber’s Andalusian Capital Partners had nearly 175,000 shares of Consolidated-Tomoka Land Co. (NYSEMKT:CTO) in its portfolio at the end of December.

According to a Schedule 13G filing, Royce & Associates LLC, founded by Chuck Royce, currently owns 805,900 shares of Finish Line Inc. (NASDAQ:FINL), which make up 1.82% of the company’s outstanding shares. This represents a decrease from the 3.33 million-share stake disclosed in the hedge fund’s 13F filing for the fourth quarter of 2015. Finish Line is a premium retailer of athletic shoes, apparel, and accessories whose shares have declined by 22% in the past year. Even so, the stock has gained 7% since the beginning of 2016.

Finish Line Inc. (NASDAQ:FINL)’s consolidated net sales for fiscal year 2016 that ended February 27 reached $1.89 billion, increasing by 3.8% year-over-year. What’s more, the company’s comparable-store sales grew by 1.8% year-over-year. Nonetheless, fiscal year 2016 diluted earnings per share dropped to $0.48 from $1.70 reported for the previous fiscal year. The retailer’s management anticipates same-store sales to grow in the range of $3%-to-5% in fiscal year 2017, while earnings per share are anticipated to fall in the range of $1.50-to-$1.56. The stock is priced at around 11.3-times expected earnings, significantly below the forward P/E multiple of 20.7 for the apparel retail industry. Just recently, analysts at Jefferies lifted their price target on Finish Line to $24 from $22 and maintained a ‘Buy’ rating, saying that the retailer is “setting up to go back on the offensive” by driving up earnings growth and productivity through store closures.

The number of money managers in Insider Monkey’s database which owned stakes in the retailer shrank to 18 from 25 during the October-to-December period. Richard Rubin’s Hawkeye Capital acquired a new stake of 852,045 shares in Finish Line Inc. (NASDAQ:FINL) during the December quarter.

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