A review of Jeffrey Smith's investing strategy and take a look inside Starboard Value's stock portfolio. Largest holdings include Perrigo Company PLC (NYSE: PRGO), Altaba Inc (Nasdaq: AABA), and Marvell Technology Group Ltd. (Nasdaq: MRVL).
Jeffrey Smith’s Fresh Start
Jeffrey Smith is an activist investor and the founder, CEO and chief investment officer of Starboard Value LP.
After Smith graduated from the Wharton Business School in 1994, he joined Société Générale where he worked in the mergers and acquisitions department. In 1996 he joined his father’s company, Fresh Juice, where he was in charge of strategic development and investor relations.
In 1998, when Fresh Juice was sold, he moved to Raimus Capital, a New York based hedge fund. In 2002, Smith and a colleague, Mark Mitchell, started Starboard Value as a subsidiary within Raimus Capital. In 2011, Starboard Value became an independent company.
Starboard invests in deeply undervalued companies and engages with management teams to find ways to unlock value. The firm employs 25 investment professionals and according to its latest 13F filing, manages just over $4 billion.
As an activist investor, Smith and members of his team have held numerous board positions at companies within their portfolio. Amongst other companies, Smith has served on the boards of Phoenix Technologies, S1 Corporatio, Kensey Nash, Actel, Zoran, Regis, Yahoo and Surmodics.
Focussing on Long-term Profitability
Jeff Smith has developed a reputation as an aggressive activist investor and was described by William Cohan of Fortune as “the most feared man in corporate America." However, Smith disputes this and says many management teams appreciate his guidance.
He believes that activist investors can sometimes make better decisions regarding a company. In an interview he implied that outsiders can have a more objective view of a company because their opinion is less personal than that of insiders. He said that for insiders, "It becomes about so much more than making the right decisions every day for the company."
Starboard tries to work out how a company can be better run for the long term, without being clouded by short-term issues.
In a 2012 interview Smith explained that he often finds opportunities when a company transitions from its initial growth phase into a more mature company. This is the time that management will often make mistakes and the share price will come under pressure. If Starboard can help the management team refocus on its core business, this will often generate a return for shareholders.
He also stated that Starboard usually focuses on companies with a market value of around $1 billion. At that size a company’s growth is usually slowing and the management team needs to start focussing on generating returns on invested capital rather than on growth. At that size Starboard is also able to hold a large enough position to have influence.
Starboard invested in AOL in 2012, and then Yahoo in 2014. Initially Starboard requested that five directors on the AOL board be replaced, though shareholders rejected this proposal. AOL was later bought by Verizon, who then bought most of Yahoo’s core business. Ultimately, Starboard made a profit on its AOL stake, but very little on its Yahoo stake.
Smith’s biggest coup was replacing the entire board of Darden Restaurants, Inc. (NYSE: DRI) , the owner of Olive Garden and Red Lobster. He also pushed for Darden to spin off its real estate investments as a REIT (Real Estate Investment Trust), thereby unlocking value for shareholders.
In 2015, Starboard invested in The Brink's Company because they believed its margins could be improved, based simply on that fact that its competitor’s margins were twice as high. After Brinks improved efficiencies in its supply chain, the share price rose from its 2015 low of $20 to over $80 by the end of 2017.
In 2017, Starboard won five seats on the board of Perrigo Company PLC (NYSE: PRGO) after building a 4.6 percent stake in the company. Smith believes that while the market sees Amazon.com, Inc. (Nasdaq: AMZN) as a threat to Perrigo’s business, it actually offers Perrigo a new channel for distribution.
Below I take a closer look at Starboard’s current portfolio.
Starboard Value's Largest Holdings
On February 14th, Jeffrey Smith's firm Starboard Value filed its quarterly Form 13F regulatory filing. I reviewed the filing to gain a glimpse into the firm's large portfolio.
Starboard Value's stock portfolio totals $4.1 billion according to the latest filing. The list value of stock holdings is up 10.4% when compared to the last quarter. As a benchmark, the S&P 500 was up 6.1% over the same period.
The Ideas section of finbox.io tracks top investors and trending investment themes. You can get the latest data on the holdings discussed below at the Starboard Value page. The following table summarizes the firm's largest holdings reported in the last filing:
|Ticker||Name||Holding ($mil)||% Of Portfolio|
|PRGO||PERRIGO CO PLC||$840.3||20.6%|
|MRVL||MARVELL TECHNOLOGY GROUP LTD||$724.0||17.7%|
|MLNX||MELLANOX TECHNOLOGIES LTD||$323.9||7.9%|
|AAP||ADVANCE AUTO PARTS INC||$316.5||7.7%|
|CARS||CARS COM INC||$131.9||3.2%|
The seven positions above represent 78.8% of the fund's total portfolio. Perrigo remains its largest holding with a long position in the company worth $840.3 million.
Altaba Inc (Nasdaq: AABA) is Jeffrey Smith's second largest position and represents 17.9% of his firm's total portfolio.
Marvell Technology Group Ltd. (Nasdaq: MRVL) is Starboard Value's third largest position and represents 17.7% of his firm's total portfolio.
Starboard Value's 6 Largest Purchases
I also used finbox.io to find Starboard Value's largest buys last quarter. Here's the list of the biggest stock purchases determined by comparing the last two filings:
|Ticker||Name||Purchased ($mil)||% Of Portfolio|
|CARS||CARS COM INC||$131.9||3.2%|
|FCE.A||FOREST CITY RLTY TR INC||$47.5||3.1%|
|TYPE||MONOTYPE IMAGING HOLDINGS IN||$33.8||2.0%|
The largest stock purchase for the quarter was Cars.com Inc (NYSE: CARS). Starboard Value increased its position in the company by $131.9 million and the stock now represents 3.2% of the firm's portfolio.
Starboard Value's 7 Biggest Sells
Here's the list of biggest position reductions determined by comparing the last two filings:
|Ticker||Name||Sold ($mil)||% Of Portfolio|
|MLNX||MELLANOX TECHNOLOGIES LTD||$1,976.2||7.9%|
|PRGO||PERRIGO CO PLC||$1,676.3||20.6%|
|MRVL||MARVELL TECHNOLOGY GROUP LTD||$118.4||17.7%|
|HPE||HEWLETT PACKARD ENTERPRISE C||$39.8||1.1%|
The largest stock sale for the quarter was Mellanox Technologies, Ltd. (Nasdaq: MLNX). Starboard Value reduced its position in the company by $1,976.2 million and the stock now represents 7.9% of the firm's portfolio.
The next largest stock sale was Perrigo where Starboard Value reduced its position by $1,676.3 million.
Starboard Value's 7 Bullish Analyst Targets
Banks and brokerages often release 12 to 18 month price targets for the stocks they cover. Analyst upgrades and downgrades alone can often impact a company's stock price.
"In the short run, the market is a voting machine but in the long run, it is a weighing machine." - Benjamin Graham
The table below ranks stocks in Starboard Value's portfolio with most bullish analyst targets:
|Ticker||Name||Upside (Analyst Target)||% Of Portfolio|
|TYPE||MONOTYPE IMAGING HOLDINGS IN||34.9%||2.0%|
|EVHC||ENVISION HEALTHCARE CORP||18.5%||2.2%|
|BAX||BAXTER INTL INC||18.4%||1.9%|
|CTSH||COGNIZANT TECHNOLOGY SOLUTIO||12.4%||1.7%|
Brink's Company (NYSE: BCO) appears to be the most undervalued stock in the fund based on the average price target from Wall Street analysts.
Managers with more than $100 million in qualifying assets under management are required to disclose their holdings to the SEC each quarter via 13F filings. Qualifying assets include long positions in U.S. equities and ADRs, call/put options, and convertible debt securities. Shorts, cash positions, foreign investments and other assets are not included. It is important to note that these filings are due 45 days after the quarter end date. Therefore, Starboard Value's holdings above represent positions held as of December 31st and not necessarily reflective of the fund's current stock holdings.
However, most can agree that with thousands of stocks traded on U.S. exchanges, doing thorough research on each one is nearly impossible for smaller investors. Leveraging the resources of the largest hedge funds on Wall Street can be a powerful way to narrow down the list.
Author: Matt Hogan
Expertise: Valuation, financial statement analysis
Matt Hogan is a co-founder of finbox.io. His expertise is in investment decision making. Prior to finbox.io, Matt worked for an investment banking group providing fairness opinions in connection to stock acquisitions. He spent much of his time building valuation models to help clients determine an asset’s fair value. He believes that these same valuation models should be used by all investors before buying or selling a stock.
Matt can be reached at email@example.com.
As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.