Starboard Value’s Bullish Moves and Top Picks For 2016

New York-based activist hedge fund Starboard Value LP and its founder Jeffrey Smith have gained a lot of recognition in the last few years for their campaigns involving several large corporations. However, it looks like those crusades weren’t quite fruitful for the firm in 2015. According to our analysis of Starboard Value LP’s 13F holdings in companies worth over $1 billion, its 20 long positions delivered a weighted average loss of 10.7% in 2015. According to its latest 13F filing, the fund made some notable changes  in its portfolio during the last quarter of 2015. Starboard Value’s equity portfolio at the end of December was worth $3.71 billion, but its top 10 holdings accounted for nearly 74% of the value. In this post, we will take a look at the two biggest bullish moves made by the fund during the fourth quarter and analyze its top three equity holdings.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points in our backtests covering the period between 1999 and 2012 (see the details here).

Baxter International Inc (NYSE:BAX)

– Shares Owned by Starboard Value LP (as of December 31): 2.4 million

– Value of Holding (as of December 31): $91.56 million

The 16% rise of the stock during the fourth quarter and Starboard Value LP increasing its stake in the company by 92% helped Baxter International Inc (NYSE:BAX) to become the fund’s eleventh largest equity holding at the end of December. The healthcare major is among the few stocks this year that is trading in the green currently. Despite the strong performance, some analysts feel that it is still undervalued since it currently trades at a price-to-earnings multiple of 21.76 and trailing price-to-sales multiple of 2.06 versus industry averages of 24.69 and 2.72, respectively. On February 3, analysts at BMO Capital Markets reiterated their ‘Market Perform’ rating on the stock, but upped their price target to $38 from $33. Ken Griffin‘s Citadel Investment Group more than quadrupled its stake in Baxter International Inc (NYSE:BAX) to almost 7.55 million shares during the fourth quarter.

Four Corners Property Trust Inc (NYSE:FCPT)

– Shares Owned by Starboard Value LP (as of December 31): 3.87 million

– Value of Holding (as of December 31): $93.7million

After months of pushing Darden Restaurants, Inc. (NYSE:DRI) to hive off its real estate holdings, Starboard Value’s plan was materialized last November when the former spun off Four Corners Property Trust (NYSE:FCPT) into an independent publicly-traded company. Four Corners Property Trust Inc (NYSE:FCPT) represented Starboard Value’s largest new position at the end of December. Shares of Four Corners Property Trust are currently trading 34% down year-to-date, with most of the declines coming in after the company announced a dividend of $8.32 per share in early-January. On January 27, analysts at JMP Securities reiterated their ‘Market Perform’ rating on the stock, but lowered their price target on it to $19.50 from $27.50.

#3 Yahoo! Inc. (NASDAQ:YHOO)

– Shares Owned by Starboard Value LP (as of December 31): 7.1 million

– Value of Holding (as of December 31): $236.28 million

Although Starboard Value didn’t make any changes to its stake in Yahoo! Inc. (NASDAQ:YHOO) during the fourth quarter, the company jumped two sports quarter-over-quarter to become the fund’s third top stock pick at the end of December. After Yahoo! Inc. (NASDAQ:YHOO) failed to spin-off its stake in Alibaba Group Holding Ltd (NYSE:BABA) due to concerns of massive tax liability, Starboard Value LP sent a letter to the company’s board last November asking it to start evaluating its core business instead. Since then the fund has sent several letters to the board and is even preparing for a proxy battle against the company. While it seemed the fund’s pleas were falling on deaf ears till a few weeks ago, that doesn’t seem to be the case anymore. Yahoo! Inc. recently revealed that it has hired financial advisers and also formed a committee of independent directors to evaluate and facilitate the selling of its core business. Jeffrey Tannenbaum’s Fir Tree increased its stake in Yahoo! by 26% to nearly 9.95 million shares during the October-December period.

#2 Advance Auto Parts, Inc. (NYSE:AAP)

– Shares Owned by Starboard Value LP (as of December 31): 1.71 million

– Value of Holding (as of December 31): $256.98 million

Starboard Value LP kept its holding in Advance Auto Parts, Inc. (NYSE:AAP) unchanged during the fourth quarter. The investor initiated a position in Advance Auto Parts, Inc. (NYSE:AAP) during the third quarter and immediately went activist. It asked the company to consider returning some cash to shareholders and also suggested that the stock could be worth $350 if it took steps to improve its margins. Unlike other companies, Advance Auto Parts, Inc. (NYSE:AAP) didn’t put up a fight with Starboard and reached an agreement with the fund on November 12. Under the terms of the agreement it agreed to oust its CEO and to expand its board to 13 from 12 and to include Jeffrey Smith as a director. In addition to that, the company also agreed to allow Starboard Value to nominate two additional directors at its 2016 annual meeting. For the fourth quarter, Advance Auto Parts posted EPS of $1.22, beating the estimates of $1.20, but the revenue of $2.03 billion was slightly lower than the $2.03 billion expected by the Street. Following the results, analysts at Deutsche Bank reiterated their ‘Buy’ rating on the stock, while upping their price target to $190 from $175. Steve Cohen‘s Point72 Asset Management initiated  a stake in the company during the fourth quarter by purchasing over 1.45 million shares.

 #1 Darden Restaurants, Inc. (NYSE:DRI)

– Shares Owned by Starboard Value LP (as of December 31): 11.64 million

– Value of Holding (as of December 31): $740.45 million

Despite the heavy decline its stock suffered after it spun off Four Corners Property Trust Inc (NYSE:FCPT) in November, Darden Restaurants, Inc. (NYSE:DRI) remained Starboard Value LP’s top pick going into 2016. However, according to its recent filings the fund has been reducing its stake in Darden Restaurants, Inc. (NYSE:DRI). On February 5, it disclosed that it plans to sell 2.7 million shares of the company to bring its total holding down to nearly 5.15% of all outstanding shares of Darden Restaurants. For its fiscal 2016 third quarter, analysts are expecting the company to report EPS of $1.06 on revenue of $1.80 billion, compared to EPS of $0.99 on revenue of $1.73 billion it delivered in the same quarter of the previous year. On February 16, analysts at Maxim Group reiterated their ‘Buy’ rating on the stock, but lowered their price target to $70 from $73. David Costen Haley‘s HBK Investments increased its stake in Darden Restaurants by 44% to 817,000 shares during the fourth quarter.

Disclosure: None