Starboard Value Warns of Looming Election Contest at Insperity Inc. (NSP), Plus 3 Other Activist Moves

It has been shown in the past that activist hedge funds can deliver above-average returns that are uncorrelated with broader market returns, but that has not been the case in the past year or so. S&P’s U.S. Activist Interest Index, which tracks the performance of stocks targeted by activist investors, has lost 21% over the past year, whereas the S&P 500 Index has returned slightly below 1% over the same time span. Nonetheless, retail investors tracking activists’ moves need not to worry about the disappointing performance of this group of investors, considering that some turnarounds may take time to bear fruit. It would be more appropriate to look at the returns generated by each activist target individually rather than look at this basket of stocks as a whole. The main problem with tracking the entire group of targets is that some activist campaigns can take more than five years to yield some results, while others can take less than two years. Therefore, the disappointing returns of some long term-oriented campaigns may subdue the strong returns delivered by short-lived campaigns. Having said that, this article will examine four SEC filings submitted by several activist investment vehicles tracked by Insider Monkey.

At Insider Monkey, we track around 730 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).

According to a newly-amended 13D filing, Jeffrey Smith’s Starboard Value LP owns nearly 3.34 million shares of Insperity Inc. (NYSE:NSP), which account for 15.7% of the company’s outstanding common stock. The position has not undergone any changes thus far in 2016, as Starboard Value owned the same amount of shares on December 31. However, the filing was submitted to report that the activist hedge fund delivered a letter to Insperity on March 12, nominating John Morphy and Michael F. Shea as director candidates for election to the company’s Board of Directors at Insperity’s 2016 annual meeting of stockholders. Let us remind you that Mr. Smith’s activist firm reached an agreement with the company in March 2015 pursuant to which three directors recommended by Starboard were appointed to the Board. The SEC filing also said that Starboard believes the provider of human resources (HR) and business solutions “has made progress over the past year, but that the Issuer [Insperity] remains undervalued and that additional opportunities remain to improve the Issuer’s operations and corporate governance”. Mr. Smith and his team intend to continue engaging with the company’s Board and management to arrive at “a mutually agreeable resolution that would avoid the need for an election contest at the 2016 Annual Meeting”. The company has rejected the activist firm’s settlement proposals so far, while Insperity’s counterproposals were considered to be inadequate by Starboard. Some investors have previously voiced their concerns over the company’s corporate governance, saying that it had been managed like a private business until Starboard Value got involved.

The human-resources services provider registered revenue of $2.60 billion in 2015, which represented an increase from $2.36 billion in 2014 and $2.26 billion in 2013. The company’s net income for 2015 reached $39.4 million or $1.58 per diluted share, up from $28.0 million or $1.05 per diluted share in 2014. Shares of Insperity are up by 6% year-to-date and trade at a forward P/E multiple of 13.7, which is below the ratio of 16.7 for the S&P 500 Index. A total of 25 hedge funds in our system were invested in the company at the end of 2015, amassing 26% of its total shares. Bruce Salamon’s Elberon Capital held a stake of 445,500 shares of Insperity Inc. (NYSE:NSP) at the end of December, a position was the fund’s most valuable.

The next two pages of this article digest three separate SEC filings submitted by Starboard Value and other funds monitored by our team.

In a separate 13D filing, Starboard Value LP reported owning 6.69 million shares of Darden Restaurants Inc. (NYSE:DRI), which constitute 5.2% of the company’s total shares. This marks a decrease of 1.29 million shares since the activist fund filed on the company earlier this month. Starboard has been gradually trimming its position in Darden Restaurants over the course of this year, as revealed by several 13Ds filed with the SEC. It should be noted that the feared activist investor managed to replace the entire Board of the owner of full-service dining restaurants in 2014, after winning shareholder support for all 12 of Starboard’s nominated directors. Under Mr. Smith’s lookout, Darden Restaurants Inc. (NYSE:DRI) implemented effective cost cutting measures and completed the spin-off of six LongHorn Steakhouse restaurants and 418 restaurant properties into a real estate investment trust, called Four Corners Property Trust.

The operator of restaurant chains Olive Garden and LongHorn Steakhouse generated sales of $3.30 billion during the six months that ended November 29, which was an increase of 4.5% year-over-year. The company anticipates combined Darden same-restaurant sales to increase by 2.5%-to-3.0% in fiscal year 2016, with an increase in Olive Garden same-restaurant sales ranging from 1.5% to 2.5% and an increase in LongHorn Steakhouse sales of between 3.0% and 4.0%. Shares of Darden Restaurants have advanced by 34% over the past two years, which may explain Starboard’s recent sales. The stock is priced at 17.2-times expected earnings, significantly below the forward P/E multiple of 24.3 for the Restaurants industry. Cliff Asness’ AQR Capital Management reported owning 3.49 million shares of Darden Restaurants Inc. (NYSE:DRI) in its 13F filing for the fourth quarter of 2015.

In a recently-submitted SEC filing, Joseph A. Jolson’s Harvest Capital Strategies LLC revealed the delivery of a formal notice to Green Dot Corporation (NYSE:GDOT) of its plans to nominate three director candidates for election to the company’s Board of Directors at its 2016 annual meeting of shareholders. As revealed by the filing, Harvest Capital owns 3.64 million shares of Green Dot, which make up 7.3% of the company’s outstanding shares. The investment firm has publicly voiced its concerns with the financial, operational, and stock performance of the provider of reloadable prepaid debit cards and related services under the leadership of Chairman and Chief Executive Officer, Steve Streit. Harvest Capital sent a letter to the company’s Board in January voicing its discontent with the “continued mismanagement and value destruction” at Green Dot Corporation (NYSE:GDOT). The investment firm also claimed that Green Dot can double its bottom-line results over the next three years should the troubled company implement certain initiatives presented by Harvest Capital’s team. The removal of the current CEO, reconstruction of the Board, adjustment of cost-structure and optimization of capital structure are a few of those initiatives that could assist the company in achieving a turnaround. “Despite its strong brand and attractive business model, Green Dot has consistently delivered disappointing results for many years under CEO Steve Streit’s stewardship, while the Board has proven incapable of holding him accountable”,  said one official of Harvest Capital. Shares of Green Dot have advanced by a whopping 38% since the beginning of 2016. The smart money sentiment towards the company declined in the fourth quarter, as the number of funds with stakes in Green Dot dropped to 12 from 16 quarter-over-quarter. Ken Griffin’s Citadel Advisors LLC trimmed its stake in Green Dot Corporation (NYSE:GDOT) by 17% in the December quarter, ending 2015 with 1.46 million shares.

As revealed by a 13D filing, Scopia Capital Management LP, founded by Matt Sirovich and Jeremy Mindich, currently owns 4.39 million shares of Itron Inc. (NASDAQ:ITRI), which represent 11.6% of the company’s outstanding common stock. This is up from the stake of 4.01 million shares disclosed in the fund’s previous 13D filing on the company, which was submitted with the SEC in mid-February 2016. In September 2015, Scopia Capital and Jerome J. Lande and Craig Rosenblum’s Coppersmith Capital Management joined forces to launch an activist campaign against the technology company; all parties involved in this play reached an agreement in December 2015 that stipulated the appointment of Jerome Lande and Peter Mainz to the company’s Board of Directors. It should also be noted that Jerome J. Lande and Craig Rosenblum will be joining Scopia’s team in the foreseeable future.

The technology company, which provides end-to-end smart metering solutions to electric, natural gas, and water utilities, has seen its shares advance by 18% since the beginning of 2016. There were 17 hedge funds in our database with stakes in Itron at the end of December 2015, with them having stockpiled nearly 20% of the company’s shares. Jim Simons’ Renaissance Technologies was one of those firms invested in Itron Inc. (NASDAQ:ITRI) at the end of 2015, holding a stake of approximately 399,000 shares.

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