By Matt Doiron
Several weeks after the end of each quarter, hedge funds and many other major investors are required by the SEC to file 13Fs, disclosing many of their long equity positions as of the end of that quarter. We track many of these filings and have found that the included information can be useful in developing investment strategies; for example, the most popular small-cap stocks among hedge funds generate an average excess return of 18 percentage points per year (read more about imitating hedge funds' small-cap picks). We can also look at individual filings to see which stocks top managers have owned. Read on for our quick take on the five largest holdings by market value in Jeffrey Smith's Starboard Value's portfolio, see the full 13F on the SEC website, and compare these picks with those in previous filings.
The fund has been pushing for a replacement of Board members at Office Depot (ODP), currently its largest holding, arguing that the current board is not qualified to represent shareholder interests in the $1.1 billion market cap office supply store. Office Depot is currently planning a merger with peer OfficeMax, a move which could potentially improve the prospects of the combined company though of course there are significant integration risks involved (Starboard supports the deal). Wall Street analysts are expecting only 3 cents per share in earnings this year, and very little profitability in 2014, as well resulting in a forward P/E of more than 40.
Starboard reported a position of almost 8 million shares in Compuware (CPWR). A number of hedge funds have expressed dissatisfaction with the enterprise software company's operations, and the Board recently rejected a takeover offer from billionaire Paul Singer's Elliott Management. There have been some reports that Compuware is exploring a sale, and currently the stock is trading above the price that Elliott had offered. Markets appear to be pricing in a significant probability of a deal, with both the trailing and forward earnings multiples being above 25 and therefore somewhat out of line with business fundamentals.
Integrated Device Technology (IDTI) was another of Smith's picks, with his stake staying constant through Q1 at 12.5 million shares. Starboard has a presence on the semiconductor company's Board of Directors, and the stock price has risen 21% in the last year. At a market capitalization of $1.1 billion, Integrated Device Technology trades at 16 times forward earnings estimates; however, this figure includes bullish expectations for the next couple of years with adjusted earnings being quite low recently. Revenue slipped 9% in Integrated Device Technology's most recent quarter compared to the same period in the previous fiscal year.
Smith and his team increased their holdings of Calgon (CCC) from 1.8 million shares at the beginning of January (Calgon was a new position for Q4) to 5.1 million shares by the end of March. The water and air treatment products manufacturer just reported a slight earnings beat and a revenue miss for the first quarter of 2013. Starboard recently agreed with Calgon to nominate two independent directors- with no association with either the company or the fund- to Calgon's board at this year's annual meeting. The most recent data shows that 13% of the float is held short, so a number of market players are bearish.
According to the 13F, the fund owns 7.3 million shares of $490 million market cap paper products company Wausau Paper (WPP). Daily dollar volume is well over $1 million with an average of about 220,000 shares traded daily and a current stock price close to $10. Smith recently succeeded in getting two hand-picked candidates added to the Board of Directors, which may help him push management into selling parts or all of Wausau's business. Wausau has been unprofitable the past couple of quarters, underperforming expectations, and certainly the paper industry is not a particularly promising investment opportunity.