ValueAct Capital Keeps Portfolio Largely Unchanged, Adds Stake In Cybersecurity Firm

Founded in 2000 by Jeffrey Ubben, Peter Kamin and George Hamel Jr., ValueAct Capital is today one of the largest activist hedge funds in the world. The San Francisco-based activist hedge fund, which is known for using less aggressive tactics than its peers, garnered significant limelight by taking a huge position in Microsoft Corporation (NASDAQ:MSFT) way back in the first quarter of 2013 when the stock was trading below the $30 level. Since then, Microsoft’s stock has more than doubled and ValueAct has moved on to making large bets in other industries including media and finance. However, the fund continues to remain  bullish on Microsoft Corporation.

As its latest 13F filing shows, Microsoft Corporation represented ValueAct’s largest equity position going into 2017, accounting for almost 20% of the $12.17 billion that its 13F equity portfolio was worth at the end of the last year. The filing also revealed that during the fourth quarter the fund’s portfolio remained nearly unchanged as the fund didn’t liquidate any of its holdings completely. However, it made additional purchases in five stocks and reduced its holdings in three companies. In this post, we are going to go through the five major moves made by ValueAct during the fourth quarter and will try to understand its reasoning behind these moves.

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NetScout Systems, Inc. (NASDAQ:NTCT)

– Shares Held By ValueAct Capital (as of December 31): 1.64 Million

– Value of The Holding (as of December 31): $51.81 million

NetScout Systems, Inc. (NASDAQ:NTCT) was the only new entrant in ValueAct’s equity portfolio during the fourth quarter and it represents its smallest holding in terms of value. The cyber security firm saw its stock plunge between October 2015 and February 2016, although it has had an astonishing bull run since then, recouping all the losses and appreciating by almost 90% in the past year. On January 17, prior to the company’s  third quarter earnings release, analysts at B. Riley reiterated their ‘Buy’ rating and $45 price target on the stock, which suggests a potential upside of nearly 20%. For its fiscal 2017 third quarter, the company declared EPS of $0.60 on revenue of $311.51 million, compared to EPS of  $0.58 on revenue of 433.40 million it had reported for the same quarter last year.

We’ll check out four other major fourth-quarter moves made by ValueAct on the following two pages of this article.

Allison Transmission Holdings Inc (NYSE:ALSN)

– Shares Held By ValueAct Capital (as of December 31): 10.52 Million

– Value of The Holding (as of December 31): $354.59 million

With ValueAct Capital reducing its stake in Allison Transmission Holdings Inc (NYSE:ALSN) by 44% during the fourth quarter, the company dropped three positions in the fund’s portfolio during that period and became its eleventh largest holding, in terms of value, at the end of December. The fund had initiated a stake in the company during third quarter of 2013 and signed a cooperation agreement with it in December 2014. In a recent regulatory filing, ValueAct revealed that it has agreed to sell the remaining 10.52 million shares it owns back to the company at a price of $34.50 per share.  Allison Transmission Holdings Inc (NYSE:ALSN)’s stock ended the fourth quarter up by over 17% and most of those gains came after Barron’s published an article on November 5 that proclaimed the stock could see a 25% upside. This year too, Allison’s stock has continued its upward march by rising 10.54% year-to-date. However, most analysts now consider the stock, which is currently trading at a forward price-to earnings multiple of 20.88, to be reasonably valued.

Morgan Stanley (NYSE:MS)

– Shares Held By ValueAct Capital (as of December 31): 26.90 Million

– Value of The Holding (as of December 31): $1.13 billion

Having initiated its position in Morgan Stanley (NYSE:MS) during the second quarter of 2016, ValueAct Capital decided to book some of its profit in the company during the fourth quarter by lowering its holding 35%. One can’t blame ValueAct for that decision as Morgan Stanley (NYSE:MS)’s stock has appreciated by over 50% since the end of 2016. This feat becomes even more astonishing if one takes into account the size of Morgan Stanley (NYSE:MS), which is considered one of the foremost financial institutions in the world. Although some analysts believe that this recent run up in the stock has made the stock slightly overvalued, most of them continue to remain bullish on the company citing favorable economic outlook and rising rate environment. On February 7, analysts at Daiwa Capital Markets upgraded Morgan Stanley (NYSE:MS)’s stock to ‘Outperform’ from ‘Hold’.

Baker Hughes Incorporated (NYSE:BHI)

– Shares Held By ValueAct Capital (as of December 31): 27.41 Million

– Value of The Holding (as of December 31): $1.78 Billion

After having reduced its stake in Baker Hughes Incorporated (NYSE:BHI) by 23% during the third quarter, ValueAct Capital lowered it by another 8% during the fourth quarter. The fund had initiated its stake in Baker Hughes Incorporated (NYSE:BHI) during the fourth quarter of 2014 and had played a key role in its failed merger with Halliburton Company (NYSE:HAL), for which it also had faced a lawsuit from The U.S. Department of Justice. Though the merger was scrapped by both the companies in May last year due to regulatory hurdles, Baker Hughes’s stock has done extremely well since then by appreciating almost 35%. This rally in the stock along with Baker Hughes not hiking its quarterly dividend has significantly lowered the company’s forward yield, which currently stands at 1.12%. Earlier this month, analysts at Susquehanna upgraded the stock to ‘Positive’ from ‘Neutral’, but kept their price target on it unchanged at $71.

Microsoft Corporation (NASDAQ:MSFT)

– Shares Held By ValueAct Capital (as of December 31): 38.62 Million

– Value of The Holding (as of December 31): $2.4 Billion

As discussed previously Microsoft Corporation (NASDAQ:MSFT), one of the biggest enterprise software companies in the world, continued to remain ValueAct’s largest equity holding at the end of 2016. During the fourth quarter, the fund increased its stake in the company by 1,819 shares, a very small hike considering the size of its position. Microsoft’s stock has rose over 50% since the time its CEO Satya Nadella took charge of the company in February 2014 and changed its trajectory to ‘mobile first, cloud first’. The company has also been hiking its quarterly dividend over the past few years and at $0.39 per share it currently translates to a forward yield of 2.42%, which is among the highest in the large-cap tech space. Analysts who track the company have appreciated the exponential growth of its cloud platform, Azure, among enterprise customers and most of them believe this growth will continue for the next few quarters. Currently, the 37 leading analysts and research firms covering the stock have an average rating of ‘Overweight’ and an average price target of $70 on it, suggesting further upside of 8%.

Disclosure: None