An Activist Hedge Fund Is Bullish on These Stocks, Should You Buy?

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If you belong to the school of thought that believes analyzing the fundamentals of a company is the best way to decide if it’s a worthy investment, you may want to take a look at Starboard Value’s top five picks. Founded by Jeffrey Smith in 2002, Starboard Value is a fundamental-oriented activist hedge fund that focuses on small cap stocks.

It has grown the amount of assets it has under management to more than $1 billion. Most of these assets are from the technology and services sectors, and it's always important to track hedge fund sentiment for its market-beating potential.

The top five

The largest holding is Office Depot (NYSE: ODP). Its 52-week trading range is between $1.61 and $6.10. The company has been in meaningful talks with OfficeMax to merge. The merger makes sense if the two are to formidably compete with rival Staples. The market caps of OfficeMax and Office Depot are each about $1 billion.

That compares to Staples’ market cap of roughly $9 billion. The deal is pending the results of an investigation into the merger by the Federal Trade Commission. If the deal is eventually approved, it may be worth an estimated $1.2 billion.

Integrated Device Technology (NASDAQ: IDTI) is the second largest stock in Smith’s hedge fund’s equity portfolio. The company designs, develops, manufactures, and markets a range of integrated circuits for communications, computing, and consumer industries worldwide.

In March, it shed its smart metering IC product lines by selling them to Atmel in an all-cash transaction. The move is important because it allows the company to sharpen its strategic focus, while reducing operating expenses and improving profitability, noted the president and CEO of the company, Ted Tewksbury.

Third on Starboard Value’s list is Progress Software (NASDAQ: PRGS). The company recently reported earnings for the first quarter. Although it beat Wall Street's revenue estimates, it missed on earnings per share. Specifically, its revenue year over year was up 2%. They totaled about $89 million. Its earnings per share for the quarter were $0.23. Analysts expected revenue of $86.3 million, and an EPS of $0.24.

Progress Software’s CEO Phil Pead said during the earnings conference call that the company is in the midst of executing its strategic plan. The goal is to improve the company’s operating margin, and Pead said that progress is being made. To improve the rate of its revenue growth, the company is “releasing new and innovative functionality across our solution suites and significantly increasing our customer engagement,” Pead said. The company’s plan is crucial to it being able to compete in this space.

Compuware (NASDAQ: CPWR) is fourth on Starboard’s list of stocks. Like the other companies mentioned in this story, Compuware recently reported earnings. As pointed out by Zacks Equity Research, Compuware reported an impressive third quarter in January. Earnings per share surpassed its estimate by coming in at $0.11, which was 9% higher than Zacks’ Consensus Estimate.

The strong earnings report was the result of the company’s modest revenue growth and margin expansion, according to Zacks. The next time we’ll have to review how the company’s earnings are, come May 21, when it reports its earnings for the fourth quarter. Since October, when it was trading around $8.40, the stock has enjoyed a significant run-up. It’s now trading within $1 of its 52-week high.

Wausau Paper (NYSE: WPP) rounds out the list of this top five. With sales of $822 million in 2012, it touts itself as a leading producer of environmentally conscious towel, tissue, soap, and dispensing products. It has been going through a transformation, of sorts, thanks in part to the demands of Starboard.

It used its 14.8% stake in the company as leverage in making it sell its paper segment, as well as reorganize its board. The company obliged, and recently nominated two members that Starboard recommended to its board. This will allow the company to concentrate on its tissue business, but it has an option to own up to 25% of the new company, noted Reuters.

What else can investors do?

We track over 450 funds at Insider Monkey, and while this seems like a boatload, it represents close to the top 5% of all hedge funds active in the global financial markets. In terms of who's "elite," Starboard is definitely in the conversation, and Wausau, Compuware, Progress Software, Integrated Device, and Office Depot each represent strong investment plays in their own right. Check out the rest of Starboard's stock picks here.


This article is written by Tedra DeSue and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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