Activist investors are interesting to follow since they often hold positions that they've completed significant due diligence on and are willing to drive change to unlock shareholder value. Of course this doesn't always work, so following their investments lockstep isn't necessarily the best strategy. However, understanding what drives their decisions can lead to worthy independent investment ideas. A good technique is to first understand a theme, which drives the manager's investments, and then screen the manager (and similar managers) for investments in the same sector. Why would this work? Successful investors tend to approach their portfolios and investments from both a bottom up and top down perspective. In many ways it's difficult to separate these two components and by looking across a few holdings you can tease out some common themes. Founders or CIOs may spend significant time constructing and evolving their macro views, but they also benefit substantially from their analysts' company specific research. So when you're looking through an activist investors' portfolio you should start by asking what macro views are implied in the positions and then dig deeper into the individual names. By understanding the themes at work, you can screen the selected manager (along with similar managers) for new positions that also express this theme, but are less obvious large trades. Often times a manager will play a theme from different angles and there may be other hidden gems in their holdings worthy of investigation.
In this article we're going to review some of Jana Partners' trades and positions in 2013 with an eye towards the US shale drilling theme. Jana Partners is a large event driven hedge fund founded and run by well known activist, Barry Rosenstein. The fund has around $4.8 billion reported assets in their last 13F filing date (March 31, 2013). The portfolio is typically quite concentrated with the top five positions accounting for nearly 50% of the total value (although much earlier on in 2007 and 2008 the fund had many more positions and was significantly less concentrated).
Jana Partners has obviously held a large and significant position in Agrium (AGU) for some time and although they didn't achieve their goals with this position, it's a good starting point. After reading through a few articles and commentary from Jana Partners, it became clear that a big part of this trade was the value proposition for the retail business due to significantly lower input costs from shale drilling. This led us to investigate a few other positions: Oil States International (OIS), Ashland Oil (ASH), and QEP Resources (QEP).
Oil States International: Since Jana Partners' 13D filing on April 30th, the stock is up around 21%. As with Agrium, the proposed strategy here was for some kind of spin-off to create value for shareholders. As of a few days ago the company announced its intention to spin-off its accommodations business. The remaining businesses include deep water equipment, site services and tubular management. The latter two benefit from US shale plays, although it isn't clear to what extent Jana Partners will continue to be active in the company after the spin-off. Other large holders of the position from March 2013 13F filings include Atlantic Investment Management (14.01%), Highline Capital Management (5.86%), and Proxima Capital Management (4.65%).
Ashland Oil: Although there hasn't been much public commentary from Jana Partners, the position is up around 13% since their 13D filing on April 11th. The company has four major business segments, Specialty Ingredients, Consumer Markets, Water Treatment, and Performance Materials. Analysts and commentators expect the latter two to be spun-off with the timeline accelerating thanks to pressure from Jana Partners (in fact Ashland has tested markets recently by publicly suggesting a sale of its water technology unit). So where's the shale gas relationship? Hydraulic fracturing and lower oil prices have been significant drivers of profit for both the Specialty Ingredients and Consumer Markets segments. Notable investors here include (again) Atlantic Investment Management (17%), Jana Partners (5.98%), and Summit Global Management (5.44%). Relational Investors, another widely followed activist investor, also holds a small position in the company.
QEP Resources: Since first showing up in Jana Partners' filings last year (Sep 2012) the stock is down 2.12%. Not the best performance but interesting to note that starting early 2013 they began discussing spinning out some midstream assets into an MLP. This article does an excellent job of covering the Bakken formation and related investment themes although there are several other worthy posts on Seeking Alpha and elsewhere online. We won't go into detail on the topic but we'll point out that QEP Midstream Partners LP, their MLP, filed for their IPO August 1st and we think that Barry Rosenstein played a big part in executing that trade (although that isn't verified). The MLP owns midstream assets providing services for gathering and transportation in the Williston Basin (as well as two others), home to the Bakken formation. Other notable plays in the Bakken trade, as mentioned in the linked article, are SPX Corporation (SPW) and Plains All American Pipeline (PAA). We mention this to point out that Relational Investors (who held a position in Ashland Oil) also filed a 13D with respect to SPX Corporation on May 6th.
After examining a few of these positions as well as related managers, we decided to setup a screen to check for all new positions initiated by Atlantic Investment Management, Relational Investors, and Jana Partners in 2013. The positions had to be mid cap or less (i.e. nano, micro, small, or mid cap) and be in sectors potentially related to the shale drilling theme (Conglomerate, Energy, Technology, Construction, Manufacturing, Mining, Services, Transportation). The main trade that stood out was Diamondback Energy (FANG). The company is up around 99% since Jana Partners' filing date on February 14 (i.e. the return to an investor if they had purchased the stock the date the filing came out). Unfortunately, for Jana Partners, it looks as if they actually fully redeemed by the end of the first quarter of 2013. While Atlantic Investment Management did show some interesting other positions we could have probably found other trades if we widened our net a bit and looked through other related managers. This highlights the iterative nature of investment research. We start with Jana Partners' holdings, investigate a theme we agree with, find similar positions in that theme, investigate the holders of those positions and related holdings, and then repeat. How do you narrow it down to one or two candidates? There's no escaping proper due diligence and reading through quarterly filings but by examining these well known managers' positions you get to start with a prime first list of names to work through. Good investing and we'd love to hear your feedback and comments!