The Top 3rd-Quarter Trades of Jana Partners

Activist firm reveals new stake in Encompass Health, 2 other stocks

Nov 30, 2020

Investment firm Jana Partners (Trades, Portfolio) disclosed its third-quarter portfolio earlier this month.

Founded in 2001 by Barry Rosenstein, the New York-based firm takes a value-oriented, event-driven approach to picking stocks, often entering activist positions in order to help unlock value for shareholders.

Keeping its criteria in mind, the firm entered three new positions during the quarter, sold out of two stocks and added to or trimmed a number of other existing holdings. Notable trades included a new investment in Encompass Health Corp. (EHC, Financial), the sale of Hillenbrand Inc. (HI, Financial) and Axalta Coating Systems Ltd. (AXTA, Financial) as well as a reduction of the Callaway Golf Co. (ELY, Financial) holding and a boost to Perspecta Inc. (PRSP, Financial).

Encompass Health

The firm invested in 1.7 million shares of Encompass Health, allocating 10.12% of the equity portfolio to the stake. The stock traded for an average price of $64.49 per share during the quarter. It is now the company's fourth-largest holding.

The Birmingham, Alabama-based company, which provides inpatient rehabilitation services as well as home health and hospice care, has an $8.06 billion market cap; its shares were trading around $$81.03 on Monday with a price-earnings ratio of 30.36, a price-book ratio of 5.3 and a price-sales ratio of 1.75.

The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced. The GuruFocus valuation rank of 3 out of 10 supports this assessment since the share price and the price-earnings and price-sales ratios are approaching multiyear highs.

GuruFocus rated Encompass Health's financial strength 4 out of 10. As a result of issuing approximately $825.8 million in new long-term debt over the past three years, the company has weak interest coverage. The Altman Z-Score of 2.13 also indicates the company is under some pressure.

The company's profitability fared better, scoring an 8 out of 10 rating. Even though the operating margin is in decline, Encompass has strong returns that outperform a majority of competitors and a moderate Piotroski F-Score of 4, which indicates business conditions are stable. As a result of recording a slowdown in revenue per share growth over the past 12 months, the predictability rank of four out of five stars is on watch. According to GuruFocus, companies with this rank typically return an average of 9.8% annually over a 10-year period.

Of the gurus invested in Encompass Health, Andreas Halvorsen (Trades, Portfolio) has the largest stake with 3.34% of outstanding shares. Other top guru shareholders are the Vanguard Health Care Fund (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss, Chuck Royce (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies, Lee Ainslie (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio).

Hillenbrand

With an impact of -8.43% on the equity portfolio, Jana sold its 3.3 million remaining shares of Hillenbrand. During the quarter, shares traded for an average price of $29.56 each.

GuruFocus estimates the firm gained 10.21% on the investment.

The industrial conglomerate, which is headquartered in Batesville, Indiana, has a market cap of $2.85 billion; its shares were trading around $38.07 on Monday with a price-book ratio of 2.68 and a price-sales ratio of 1.1.

According to the median price-sales value chart, the stock is undervalued. The GuruFocus valuation rank of 7 out of 10 also supports this assessment since the share price and price-sales ratio are both near one-year highs.

Hillenbrand's financial strength was rated 4 out of 10 by GuruFocus. Having issued approximately $1.1 billion in new long-term debt over the past three years, the company has poor interest coverage. The low Altman Z-Score of 1.6 also warns it is at risk of going bankrupt if it does not improve its liquidity position. Assets are also building up at a faster rate than revenue is growing, indicating it may be becoming less efficient.

The company's profitability scored a 7 out of 10 rating despite having declining margins and returns that underperform a majority of industry peers. Hillenbrand also has a low Piotroski F-Score of 3, which suggests operations are in poor shape, and a one-star predictability rank that is on watch as a result of operating income losses over the past three years. GuruFocus says companies with this rank return an average of 1.1% annually.

With 0.23% of outstanding shares, Hotchkis & Wiley is now the company's largest guru shareholder. Paul Tudor Jones (Trades, Portfolio) and Royce also have positions in the stock.

Axalta Coating Systems

Impacting the equity portfolio by -4.03%, the firm sold its 1.9 million remaining shares of Axalta Coating Systems. The stock traded for an average per-share price of $23.16 during the quarter.

GuruFocus data shows the firm has lost an estimated 0.42% on the investment.

The Philadelphia-based manufacturer of liquid and powder coatings has a $6.7 billion market cap; its shares were trading around $28.55 on Monday with a price-earnings ratio of 71.13, a price-book ratio of 5 and a price-sales ratio of 1.78.

Based on the Peter Lynch chart, the stock appears to be overvalued.

GuruFocus rated Axalta's financial strength 4 out of 10 on the back of a low cash-debt ratio of 0.33 and weak interest coverage. The low Altman Z-Score of 1.78 also warns the company is in danger of bankruptcy if it does not improve its liquidity. The return on invested capital is also surpassed by the weighted average cost of capital, meaning the company is destroying value as it grows.

The company's profitability fared a bit better with a 6 out of 10 rating, driven by and expanding margin. Its returns, however, underperform over half of its competitors. Axalta also has a moderate Piotroski F-Score of 4 and has recorded a decline in revenue per share over the past year.

Warren Buffett (Trades, Portfolio) is Axalta's largest guru shareholder with a 9.95% stake. Other top guru investors are Wallace Weitz (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss, George Soros (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio), Robert Olstein (Trades, Portfolio), Pioneer, Simons' firm, Mario Gabelli (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Ainslie and Joel Greenblatt (Trades, Portfolio).

Callaway Golf

Jana trimmed its stake in Callaway Golf by 48.01%, selling 2.7 million shares. The trade had an impact of -4.46% on the equity portfolio. During the quarter, the stock traded for an average price of $18.79 per share.

The firm now holds 2.9 million shares total, representing 5.04% of the equity portfolio. GuruFocus data shows Jana has gained approximately 14.25% on the investment, which is its largest holding, since the second quarter of 2019.

The sporting goods company, which is headquartered in Carlsbad, California, has a market cap of $1.99 billion; its shares were trading around $21.09 on Monday with a price-book ratio of 2.96 and a price-sales ratio of 1.33.

The Peter Lynch suggests the stock is overpriced. The GuruFocus valuation rank of 4 out of 10 aligns with this assessment since the share price, price-book and price-sales ratios are near multiyear highs.

Callaway's financial strength was rated 4 out of 10 by GuruFocus. As a result of issuing approximately $714.34 million in new long-term debt over the past three years, the company has weak interest coverage. The Altman Z-Score of 2.2 also indicates the company is under some pressure since its assets are building up at a faster rate than revenue is growing and the Sloan ratio indicates it has poor earnings quality. The WACC also surpasses the ROIC, indicating value is being destroyed.

The company's profitability scored a 5 out of 10 rating on the back of an expanding operating margin. Its returns, however, are negative and underperform a majority of industry peers. Callaway Golf also has a low Piotroski F-Score of 3 and a one-star predictability rank that is on watch as a result of declining revenue per share and operating income losses over the past several years.

Ken Fisher (Trades, Portfolio) is now Callaway Golf's largest guru shareholder with a 3.87% stake. Pioneer, Royce and Greenblatt also own the stock.

Perspecta

The firm expanded its second-largest holding, Perspecta, by 36.69%, buying 3.4 million shares. Shares traded for an average price of $19.78 each during the quarter.

After another post-quarter purchase, Jana now holds 13.8 million shares total, which account for 24.07% of the equity portfolio. The firm has gained an estimated 1.66% on the stake.

The Chantilly, Virginia-based IT company, which was created in 2018 when DXC Technology (DXC, Financial) completed a spinoff and merger transaction, has a $3.64 billion market cap; its shares were trading around $22.59on Monday with a price-book ratio of 2.67 and a price-sales ratio of 0.82.

The price chart shows the stock is trading above both the median price-sales value and the median price-book ratio, suggesting it is overpriced.

GuruFocus rated Perspecta's financial strength 4 out of 10 on the back of a low cash-debt ratio and weak interest coverage. The distressed Altman Z-Score of 0.77 also warns the company could be in danger of going bankrupt.

The company's profitability fared even worse, scoring a 3 out of 10 rating. While the operating margin outperforms over half of its competitors, Perspecta's returns are negative and underperform a majority of industry peers. It also has a moderate Piotroski F-Score of 4.

With an 8.62% stake, Jana is the company's largest guru shareholder. Ainslie, Steven Cohen (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Simons' firm and Royce also own the stock.

Additional trades and portfolio composition

During the quarter, Jana also established new positions in New Relic Inc. (NEWR, Financial) and The Brink's Co. (BCO, Financial), while adding to the SSGA SPDR S&P 500 (SPY, Financial) exchange-traded fund holding. It also reduced its Bloomin Brands Inc. (BLMN, Financial) and HD Supply Holdings Inc. (HDS, Financial) stakes.

The firm's $1.12 billion equity portfolio, which is composed of 10 stocks, is most heavily invested in the consumer defensive and technology sectors.

Disclosure: No positions.