JANA Partners is one of the most visible activist investment firms targeting small and large-cap companies in the United States. Its founder, Barry Rosenstein, is a billionaire and spent nearly $150 million on a home in the Hamptons last year. Of course, we are more interested in the performance of Rosenstein’s stock picks. JANA Partners has been filing 13Fs since 2003 and disclosing its long positions in US securities that are traded on major US exchanges. Our analysis indicated that Rosenstein’s small and mid-cap stock picks like Liberty Interactive Group (NASDAQ:QVCA), Starwood Hotels & Resorts Worldwide Inc (NYSE:HOT), and Citizens Financial Group Inc (NYSE:CFG) perform much better than his large-cap stock picks historically.
Let’s explain why it is important to conduct performance analysis and ride the coattails of activist hedge funds like JANA Partners. Rosenstein’s investors received annualized returns of around 17% assuming that they have been investing with Rosenstein since day 1. Usually, a hedge fund’s returns are higher in early years of its operation mainly due to survivorship bias; as a hedge fund attracts more capital and gets bigger, it starts to invest in large-cap stocks because it can’t invest all of its new capital in smaller stocks for liquidity and diversification reasons. Our analysis showed that JANA Partners’ stock picks that are disclosed in 13F filings returned an average of 1.42% per month between 2003 and 2012. The S&P 500 Total Return Index delivered 0.72% returns per month during the same period. So, overall, small investors who don’t have millions could have imitated Rosenstein’s stock picks two months after the end of each quarter and achieved similar returns of 17% or so annually between 2003 and 2012. This is possible because these investors don’t have to surrender 2% of their assets and 20% of their gains to Rosenstein.
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But wait. Things get better. Piggyback investors don’t have to invest in all of a hedge fund’s stock picks either. Theoretically we know that hedge funds’ large-cap stock picks don’t generate much alpha. Investors then, can theoretically achieve much higher returns by avoiding hedge funds’ large cap picks entirely and focusing solely on their small and mid-cap stock picks (read the details here). Our research indicated that JANA Partners’ top 5 mid-cap stock picks returned an average of 2.05% per month between 2003 and 2012. This is more than 130 basis points per month better than the average monthly return of the S&P 500 Total Return Index. This is also about seven percentage points better than the returns enjoyed by JANA Partners’ investors. In this article we will discuss JANA Partners’ three best mid-cap stock picks.
Rosenstein’s biggest mid-cap holding is in Liberty Interactive Group (NASDAQ:QVCA). Rosenstein decreased his stake in the Colorado-based media conglomerate by 4% to 7.96 million shares. This makes JANA Partners the third-largest stakeholder in the company among the hedge funds we track, with only Brahman Capital and FPR Partners holding larger positions. The fourth and fifth-largest stakeholders among the hedge funds we follow are D E Shaw and Horizon Asset Management, which like JANA, also decreased their stakes in Liberty Interactive Group (NASDAQ:QVCA), by 9% and 12% respectively.
The second stock that we will discuss is Starwood Hotels & Resorts Worldwide Inc (NYSE:HOT). JANA Partners initiated a brand new position of 2.41 million shares in the Connecticut-based hotel and leisure company during the first quarter. The stake was valued at $201.64 million and accounted for 1.17% of JANA’s public equity portfolio at the end of March. Hedge fund managers Doug Silverman and Alexander Klabin were also bullish about the stock, increasing their stake in Starwood by 152% during the first quarter.
Starwood Hotels, founded in 1969, has been struggling with low margins for some time and its CEO Frits van Paasschen resigned earlier this year. Starwood did, however, report top line growth for the first five months of fiscal year 2015, being driven by the opening of new hotels in North America. Moreover, Starwood Hotels & Resorts Worldwide Inc (NYSE:HOT) reported that is is aiming to open more hotels in North America and Europe during the remainder of the year and is also considering divesting some of its brands so as to focus more on its luxury brands like Sheraton. Performance estimates are conservatively positive, awith EPS guidance of $2.99 for 2015 and $3.48 for 2016.
JANA Partners also initiated a small 150,000-share position in the Rhode Island-based retail bank Citizens Financial Group Inc (NYSE:CFG) during the first quarter, with the new position valued at $3.62 million. David Einhorn‘s Greenlight Capital had the largest position in the stock at the end of the first quarter out of the investors in our database. The long/short hedge fund boosted its stake by 25% during the quarter.
In March, Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) sold 135 million of its shares in Citizens Financial Group Inc (NYSE:CFG), dropping its stake to 40.8%. RBS is expected to divest its entire stake in Citizens Financial by the end of next year. Citizens Financial had a good quarter, beating EPS estimates by $0.05. Its revenue rose 1.5% and profits increased 26% during the quarter. Dozens of hedge funds and billionaires including Larry Robbins, Leon Cooperman and George Soros either initiated brand new positions or boosted their stakes in Citizens Financial during the first quarter, which had one of the largest boosts in fund ownership out of any stock during the first quarter. We will focus on this stock in detail in a future article.
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