By Alex Gavrish, Etalon Investment Research | Author of “Story Investing

Activist investor sold a major part of shares received in the spin-off of Lamb Weston Holdings Inc by Conagra Brands Inc and replaced part of the holding with call options

Jana Partners, an activist hedge fund managed by Barry Rosenstein, recently disclosed its portfolio in a quarterly report filed with the SEC. Its seemingly “new” position in shares of Lamb Weston Holdings Inc attracted out attention.

We wrote about Lamb Weston before the spin-off in October of 2016, and warned investors to exercise caution as valuation is not especially attractive and free cash flow might suffer as a result of taking on new debt. So far, the shares performed reasonably well, rising 17% percent since the start of trading in November of 2016.

Lamb Weston Holdings

Lamb Weston Holdings

Despite this, current disclosure by activist hedge fund reveals some interesting dynamics.

At the end of the third quarter of 2016, Jana Partners owned 17.8 million shares of Conagra Brands as well as call options on additional 6 million shares. Combined position was valued at $941 million, making it the largest position of the fund (16.5%).

At the end of the fourth quarter, the fund’s position in Conagra Brands remained the same. In the spin-off, shareholders of Conagra Brands received one share of Lamb Weston for every three shares they owned. This means that Jana Partners was supposed to receive 5.9 million shares of Lamb Weston for their 17.8 million shares stake in Conagra Brands.

However, at the end of the fourth quarter the fund owned only 1.86 million shares of Lamb Weston, which means that activist investor sold major part of the position, or 4.07 million shares. At the same time, the fund acquired call options on 2 million shares of Lamb Weston, valued at $76 million.

One might ask what all of this means?

I think that overall, it is a negative sign. Firstly, because even after taking account of the options acquired, overall position was decreased. Secondly, it might mean that investor does not “believe” in Lamb Weston story and therefore sees no value in tying up capital in plain stock position.

But for some reason, activist investor is willing to take the risk through call options. It is possible that his way of thinking is following: “I dont believe in the stock overall, but there is some chance it will work out well, so lets invest through call options. This way if it will work out, at least we will make more as position is leveraged (through call options)”.

The problem here is that such position can be provided with a completely different explanation. For example, that investor is so positive on the stock that he is willing to invest through a more aggressive instrument with a chance of losing entire capital if the share price does not rise or declines.

It is hard to say which explanation is correct. Taking into account company’s fundamental valuation, my personal opinion is that the first one is closer to the truth. Maybe we will be able to understand more after next quarter’s filing by Jana Partners.

In the meantime, I would recommend investors to stay on the sidelines.