Monthly Archives: May 2009

Update on Trident Microsystems (TRID): Q4 FY 2009 Outlook

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Trident Microsystems announced an update to its outlook for the fourth quarter of fiscal year 2009.

Trident’s outlook for the fourth quarter of fiscal year 2009, described below, is based on current expectations, includes expected results from the recently completed acquisition of certain consumer business division assets from Micronas.

� Net revenues are expected to be in the range of $15 to $18 million.

� Gross Margin in the low 30% range.

� Non-GAAP operating loss is projected to be in the range of $15 to $17 million.

� The company expects to end the quarter with a cash balance of approximately $177 to $182 million.

TRID currently has $55 million in liabilities, and it is trading at a market cap of $92 million, well below the company’s net cash value.

  trid balance

Off-Balance Sheet Arrangements 

Lease Commitments
The Company leases facilities under noncancelable operating lease agreements, which expire at various dates through 2012. At March 31, 2009, future minimum lease payments under these non-cancelable operating leases for the remaining three months of fiscal year 2009, fiscal years 2010, 2011, and 2012, were as follows: $0.4 million, $0.9 million, and $0.6 million and $0.1 million, respectively. Rental expenses for the three months ended March 31, 2009 and 2008 were both $0.4 million. Rental expenses for the nine months ended March 31, 2009 and 2008 were $1.1 million and $1.2 million, respectively.


Purchase Commitments 


At March 31, 2009, the Company had purchase commitments in the amount of $9.3 million that were not included in the Condensed Consolidated Balance Sheet at that date. Among the $9.3 million of purchase commitments, $1.6 million of these commitments were to UMC, its principal foundry. Purchase commitments represent the unconditional purchase order commitments with contract manufacturers and suppliers for wafers and software licensing.

Shareholder Derivative Litigation

Trident has been named as a nominal defendant in several purported shareholder derivative lawsuits concerning the granting of stock options. The federal court cases have been consolidated as In re Trident Microsystems Inc. Derivative Litigation, Master File No. C-06-3440-JF. A case also has been filed in State court, Limke v. Lin et al., No. 1:07-CV-080390. Plaintiffs in all cases allege that certain of the Company’s current or former officers and directors caused it to grant options at less than fair market value, contrary to its public statements (including its financial statements); and that as a result those officers and directors are liable to the Company. No particular amount of damages has been alleged, and by the nature of the lawsuit no damages will be alleged against the Company. The Board of Directors has appointed a Special Litigation Committee (“SLC”), composed solely of independent directors, to review and manage any claims that the Company may have relating to the stock option grant practices investigated by the SLC.

Regulatory Actions

The Department of Justice (DOJ) is currently conducting an investigation of the Company in connection with its investigation into its stock option grant practices and related issues, and the Company is subject to a subpoena from the DOJ. The Company is also subject to a formal investigation by the SEC on the same issues.


Disclosure: We do not own TRID, but it is part of our ValueHuntr Portfolio.

Is XTNT a Bargain Once Again?

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A reader sent us an email yesterday asking whether XTNT is a good investment at $0.30/share given that its Board of Directors approved a plan for liquidation and that the company stock dropped a whopping 70% after the announcement was made. Our personal opinion is that the short answer is “No“, but readers are encouraged to conduct their own research.

Some of you may recall that we opened added XTNT to our portfolio on March 17, 2009. In our article, we outlined our case for XTNT. At the time, the company was selling at $0.46/share with nearly $0.80/share in cash or cash equivalents on its balance sheet. The company had already engaged Piper Jaffray  & Co. to explore strategic alternatives and had reduced its workforce by over 96% in the process. So, in a Graham-like fashion, we concluded that the margin of safety for this investment was high as long as the cash burn rate remained under control and liquidation expenses did not exceed $50M. Two weeks later, the company was trading at $0.76/share, and we exited our position for a 77% gain. 

Five days after closing our position on XTNT, the company surged to $1.50/share, which inspired us to write our article “Selling is Harder Than Buying: A Comment on XTNT” on March 31, 2009. In the article we explained that although we would have loved to keep the company for an extra five days,  keeping the company meant going beyond, if not disengaging, not only form our core discipline, but also from our original thesis.

Yesterday, the board announced that they have approved liquidating the company, but this was not the same company we had first encountered back in March. First, the company was trading at $1.00/share, which was above our March estimate for liquidation value. But most importantly, the latest 10-Q filing indicates that the company burned through nearly $7M of cash and cash equivalents between March and May, bringing the company’s net cash value down to nearly $0.50/share. Therefore, it is clear that the company is not worth the $1.00/share it was selling for just a couple of days ago.

Furthermore, the preliminary proxy filed on May 15, 2009  indicates that employee compensation, professional fees, insurance, and operating expenses would range between $0.20/share to $0.40/share, leaving only $0.10 to $0.30 per share to be distributed among stockholders.


The precipitous drop in cash and cash equivalents in XTNT highlights two key learning points:

a) The inclusion of “expected liabilities” is necessary in estimating a proper liquidating value. These can be hard to estimate.

b) “Expected liabilities” will depend on the timing of the transaction, making timing another difficult factor to evaluate in estimating liquidation value.

Both of these points emphasize the need for a wide margin of safety when engaging in this type of investment operation. This will unquestionably force us to take another look at Eden Bioscience Corp. (EDEN), a stock in our portfolio involved on this type of transaction which has a low margin of safety relative to our estimated liquidation value.

Proxy Advisory Firms Are Not Objective on Pershing Slate

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Egan-Jones Proxy Services came out last Thursday in support of most of Target Inc.’s board nominees in the retailer’s upcoming election, eschewing the slate pushed by Bill Ackman. Egan-Jones stated the following:

1. We believe that Pershing Square has provided no convincing strategic plan that would lead to improvement in long-term shareholder value.

2. We believe that the Company was transparent in its review and ultimate rejection of Pershing Square’s earlier real estate proposals.

3. We have confidence in the Company’s existing management and Board of Directors and the measures that they have undertaken, some relatively recently, to counter the difficult retailing environment.

4. While noting the relevant experience of several of the dissidents’ nominees, we are not convinced that their election would lead to significant improvements in shareholder value, nor work to the benefit of shareholders.

At Valuehuntr, we find these conclusions deeply disturbing.   Egan-Jones, much like Moody’s, depends on its paying clients to keep its doors open. But in the case of Egan-Jones, clients are institutional investors such as hedge funds, mutual funds, etc. Though we do not know for sure, it is conceivable that Egan-Jones might feel some pressure to turn out research that carries investment conclusions that would support its biggest clients’ largest positions. Could it be, for example, that the Egan-Jones’ largest revenue-generating clients are funds that are short the equity of Target, or long on the equity of competitors such as Wal-Mart? It is very likely.

The same applies to another advisory firm, Proxy Governance Inc. The firm said it would support two of the five dissident nominees. Proxy Services supports the election of Pershing Square nominees Michael L. Ashner and James L. Donald, citing Ashner’s commercial real estate experience and Donald’s retail grocery experience.

In recommending use of the GOLD proxy card, Proxy Governance noted the following:

Relevant Expertise: “Particularly in their arguments that thin director experience in areas of increasing strategic importance has led to suboptimal strategic outcomes, the dissidents make compelling points.”

Credit Cards: “The enduring strategic question, though, is not whether to sell or keep the [credit card] business but how to mitigate the substantial risk and capital intensity of a non-core business. To the extent the dissidents, rather than the board, were driving that question in 2007 and 2008, the dissident argument that director experience could be better aligned with strategic challenges seems credible.”

 Real Estate and Food Retailing: “The real strength in the dissident campaign, however, lies in the nominees, whose professional experience is directly relevant to certain strategic challenges the company faces (particularly outside its core retailing operations) yet which seem to be under-represented in the board as currently composed.”

In recommending Michael Ashner and Jim Donald, Proxy Governance stressed the following:

Real Estate: “Because the company’s sizeable holdings will continue to make real estate a significant strategic issue – even as the company has presented compelling reasons to question the TIP REIT proposal – we believe Ashner, who has extensive professional experience in commercial real estate, would add meaningfully to the current board’s composition.”

Food Retailing: “We believe the board’s ability to respond to the core strategic challenges of retailing, especially groceries, would be materially improved by the addition of the long-term grocery executive, Donald, who established Wal-Mart’s grocery business and superstore presence.”

Relevant Expertise: “We believe that J. Donald, with retail grocery experience, and M. Ashner, with commercial real estate experience, would add meaningfully to the board’s ability to assess and meet emerging strategic challenges in these two aspects of the company’s operations.”

Proxy Governance also commended Pershing Square for supporting and pressing the use of a universal proxy card, which would allow shareholders the ability to select the specific individuals it would like to see on the board from both the management and dissident slates.

It is difficult to believe that either Egan-Jones or Proxy Governance would advice against the interests of their revenue-generating clients. Therefore, these conflicts of interest may prevent Target’s shareholders to get an objective third party recommendation on Pershing’s proposal.

Tomorrow, RiskMetrics renders its decision. RiskMetrics typically advises more than 20% of shareholders, while Proxy Governance and Egan-Jones combined advice less than 10%. RiskMetrics’ recommendation will not be without conflicts. For example, The Vanguard Group owns nearly 2% of RiskMetrics, but also nearly 3% of Target.

Investment Surge is No Small Wonder

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Big money pouring into small-cap stocks has lifted the sector, but latecomers could face disappointment

By Gail MarksJarvis (Chicago Tribune, 5/13/09)

If the economy is going to crawl out of the recession in the coming months, then it would make sense to be buying small-company stocks or small-cap mutual funds. Typically, they are the big winners after the economy has hit its worst point.

While analysts have been debating whether the economy is or is not moving toward better days, many traders haven’t wasted any time. Investors have poured so much money into small caps since early March that some analysts wonder if latecomers will be disappointed if they try to follow the herd.

“We think we have moved too far, too fast,” said Merrill Lynch small-cap strategist Steven DeSanctis.

The Russell 2000 index of small-company stocks, which is tracked by several index mutual funds, has climbed more than 44 percent since the March 9 low. That’s roughly twice the norm during early rebounds, and the best return DeSanctis has found during any of the last 11 similar recessionary periods.

It’s such a gigantic move that he wonders if it has cut into the surge investors might think they will catch if they venture into small caps now. During the second half of a recession, small caps average a 19.6 percent return, while mid-cap stocks climb 18.9 percent, and large companies return 13.8 percent, said DeSanctis.

Charles Biderman, chief executive of TrimTabs Investment Research, explains some of the early move into small caps as a catch-up maneuver by hedge funds, many of which recorded sharp losses in 2008 and have been trying to give returns a quick jolt by buying low-quality stocks.

When picking through small caps in the Russell 2000 recently, investors have favored those in the shakiest condition. According to DeSanctis’ research, those with the highest level of debt are up 61 percent on average, while those less stressed by borrowing needs climbed under 37 percent.

The smallest companies, or those that might be the most fragile if they lose a major customer, need financing or must scrounge for cost savings, have climbed nearly 128 percent. Larger small-cap companies are up 30 percent.

The earnings picture is not encouraging either. Small-cap stocks reported a decline in first-quarter earnings of almost 48 percent on average, and sales were down more than 12 percent, the worst numbers collected by DeSanctis since 1996. Large companies in the Standard & Poor’s 500 index did better, with a decline in earnings of 23 percent.

Experts said the excitement over small caps cannot be explained by better prospects in the near future. Nigel Tupper, a global quantitative strategist for Merrill Lynch, has found signs of earnings improvements in companies around the globe but not for U.S. small-cap stocks.

Although investors were encouraged recently by the larger companies that exceeded earnings expectations in the first quarter, small caps as a group disappointed, reporting earnings that were 7 percent lower than expected. In addition, analysts are expecting small-cap earnings to be 43 percent lower this quarter compared with the year-earlier period.

Still, small-company stocks typically outperform larger companies out of recessions. So the Leuthold Group, an independent research firm, is suggesting investors start buying small caps in anticipation of such a period.

“It is still too early to call the beginning of a small-cap era,” said Jim Floyd, senior analyst at Leuthold. “However, as investors’ risk appetite increases and market participants embrace a potential rebound, small-cap leadership could be on the horizon.”

En Pointe Technologies, Inc. Q2 Update

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En Pointe Technologies, Inc. (ENPT) announced consolidated results for its second quarter ended March 31, 2009. Total net sales in the second quarter of fiscal 2009 decreased 35% to $45.9 million when compared to the $70.6 million reported for the second quarter of fiscal 2008. However, $9.3 million of the $24.7 million decline in net sales was attributable to the July 2008 divestiture of the IT services business. En Pointe’s gross profits decreased by $4.8 million to $6.2 million in the second quarter of fiscal 2009 as compared to $11.0 million reported in the second quarter of fiscal 2008. The decrease in gross profits was largely attributable to the July 2008 divestiture of the IT services business.

The net income for the March 2009 quarter was $0.4 million, or $0.06 per basic and diluted share, as compared with a net loss of $3.0 million, or a loss of $0.42 per basic and diluted share, in the March 2008 quarter. Bob Din, CEO of En Pointe said, “Customer demand in the second quarter continued to be very soft driven by the negative economic and credit market conditions, particularly with our large enterprise customers. We are in a challenging electronics market and continue to trim our operating costs to meet it. In the March 2009 quarter, operating costs were reduced by $5.6 million as compared to the March 2008 quarter, with the savings coming from the sale of the IT services business in July 2008 as well as other cost saving measures that we put into place during the recent quarter.”

The absence of large gross margin service sales resulting from the divesture of the IT services business was the main factor that adversely affected gross profits in the March 2009 quarter, and reduced gross profits by $4.8 million to $6.2 million from the $11.0 million in the March 2008 quarter. Product gross profits declined $0.8 million which was attributable primarily to the decline in product sales.

Selling and marketing expenses were 51.4% lower in the March 2009 quarter compared with the March 2008 quarter, due to the divesture of the IT services business and its related selling and marketing expenses as well as to other cost saving measures taken during the quarter. General and administrative expenses also declined 19.0% in the March 2009 quarter compared with the March 2008 quarter.

Net other income increased $2.6 million in the March 2009 quarter to $2.0 million as compared with the $0.6 million of net expense in the March 2008 quarter. The increase was due primarily to the recognition of the final installment of $2.0 million in sales proceeds from the sale of the IT services business and the absence of the investment losses that occurred in the March 2008 quarter.

At March 31, 2009, the Company had $8.2 million of cash and availability of an additional $18.7 million under the Company’s credit line. Accounts receivable remained relatively unchanged at $34.1 million at March 31, 2009 as compared to $35.4 million at September 30, 2008. During such six-month period, long-term debt decreased to $0.4 million from $0.5 million and stockholders’ equity declined $5.6 million to $20.1 million. The decrease in stockholders’ equity was due principally to a $5.7 million increase in Other Comprehensive Loss for the six month period ended March 31, 2009 as compared to the prior fiscal year period which resulted primarily from valuation adjustments for equity positions held by the Company, chiefly the securities that were a part of the consideration for the 80.5% sale of the IT services business.

Value Focus: A ValueHuntr Newsletter

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The first issue of Value Focus, our monthly newsletter for ValueHuntr Premium members, will be sent on June 1, 2009. The issue includes an inside look into Berkshire Hathaway’s annual meeting, investment ideas, latest SEC filings, among other topics.

To become a Premium Member, see here.


Sample Cover Page

© 2009 All rights reserved.

Bill Miller Favors U.S. Financial Stocks for the Next Two Years

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By Christopher Condon and Sree Vidya Bhaktavatsalam

(Bloomberg) — Bill Miller, Legg Mason Inc.’s most prominent stockpicker, said U.S. financial companies are his favorite investment for the next two years.

“Financials have the biggest potential to outperform” other stocks because of how far they’ve fallen in the worst bear market since the Great Depression, Miller said yesterday in an interview at a conference organized by the Investment Company Institute in Washington. The Standard and Poor’s 500 Financials Index tumbled 52 percent in the past year, compared with the 35 percent drop by the S&P 500 Index.

Miller, 59, whose Legg Mason Value Trust fund beat the S&P 500 a record 15 straight years through 2005, trailed the benchmark for the next three years as investments in homebuilders and banks soured. Those holdings led Value Trust to a 55 percent loss in 2008. The fund rose 8.7 percent this year through yesterday, leading the S&P 500 by about 5.9 percentage points.

The manager’s favorite financial stocks include San Francisco-based Wells Fargo & Co.,Capital One Financial Corp. in McLean, Virginia and New York-based American Express Co., all held by his $3.8 billion fund.

In a panel discussion earlier in the day, the Baltimore- based fund manager said investors are “shrugging off” the government’s stress tests of 19 financial institutions, designed to measure their stability in a further economic decline.

No Stress

Bank of America Corp., Citigroup Inc., Wells Fargo and GMAC LLC need to raise more capital, people familiar with the matter said yesterday. Goldman Sachs Group Inc., JPMorgan Chase & Co. and American Express were among those deemed not to need additional funds.

The S&P Financials Index rose 16 percent in the past seven sessions, while the S&P 500 climbed 7.3 percent.

“The market is telling you the stress test is a nonevent,” Miller said.

He criticized the government review for pushing banks to “raise capital when capital is in short supply,” and for signaling that banks can address the problem by converting preferred shares into common equity.

“It’s like moving money from one pocket to the other,” Miller said. “I don’t see what difference it makes.”

Miller said he expects U.S. housing prices to stabilize this year and for the economy to perform better than Federal Reserve projections. The Fed has forecast that gross domestic product will shrink by 0.9 percent in 2009.

Miller said U.S. equity markets will rise 20 percent to 30 percent in 2009. He also expected his fund to rebound.

Sensing a Rebound

“Every time we’ve had a bad year, we’ve come back from it,” he said.

Miller said emerging markets such as China will help lead developed nations to an economic recovery.

China “will pull the U.S. up with it” if its economy improves, he said during the panel discussion.

Miller pledged last year to broaden his holdings to make his main fund less dependent on any single industry. He boosted the number of stocks to 47 from 36 in the six months ended March 31, and bought energy shares for the first time since 2003.

Miller has run Value Trust since its opening in 1982. Miller, who initially managed the fund with Ernie Kiehne, took sole responsibility in 1990, the year before his winning streak began.

Pershing Square Town Hall Meeting Presentation

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Pershing Square Capital Management LP. made its case to replace Target’s Board on a meeting held in Manhattan on May 11, 2009. Click on the slide to view Bill Ackman’s presentation to shareholders and to read about Pershing’s board nominees.












Bloomberg interviewed Bill Ackman yesterday to discuss his proxy fight:

Contrarian Patience Pays Off — Finally

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(WSJ – 5/12/09)

Warren Buffett famously said he tries to be fearful when others are greedy and greedy when others are fearful. For some money managers, that isn’t just clever advice — it is an entire investing strategy.

The idea of embracing out-of-favor stocks, sometimes called contrarian investing, isn’t new. But the approach requires a strong stomach in the best markets, let alone during historic downturns.

And as investors rushed for the exits last year, these managers kept diving in, frequently engaging the most feared areas of the market.

“It’s not uncommon for a new client to call me when I buy a stock, asking me what the hell I’m thinking,” said Bernie McGinn, president and chief investment officer of McGinn Investment Management Inc.

But clients soon get used to his unorthodox approach, Mr. McGinn said, often asking why he isn’t making certain buys. “The basic premise of investing is ‘buy low and sell high,’ ” he said. “And low is when nobody else wants it.”

Even the professionals don’t always get it right. Legendary contrarian-minded managers such as David Dreman and Marty Whitman had a tough 2008, with Dreman Contrarian Large Cap Value Fund (symbol: DRLVX) and Mr. Whitman’s Third Avenue Value Fund (TAVFX) losing 45% and 46%, respectively. And Bill Miller of Legg Mason Inc., another manager with a contrarian bent, saw his Legg Mason Value Trust (LMVTX) fall 55% in 2008.
As the market has rebounded in recent weeks, these and other contrarian-style funds, with their bargain-minded ways, have been outperforming. Dreman Contrarian Large Cap Value is up about 7% so far this year, while Third Avenue Value has gained around 13% and Mr. Miller’s fund is up 8% — well ahead of the Standard & Poor’s 500′s 0.7% rise.

Contrarian investing is “a discipline that’s hard for an individual investor to follow,” said Russ Kinnel, director of mutual-fund research at investment researcher Morningstar Inc. “It’s tough to know when to get in and when, in fact, a stock deserves to be battered.”

The managers at Evergreen Capital Management take Mr. Buffett’s advice almost literally. The firm studies the flow of money moving into and out of mutual funds as a starting point for its investment decisions, looking into areas of the markets where net outflows — selling pressure — is greatest.

“Most investors are ‘wrong-cycle investors,’ ” said David Hay, chief investment officer. They chase performance, focus on short-term results, show impatience and ignore market cycles.

But patience is the key. Mr. McGinn said his portfolio turnover rate is about 30% — about one-third of its holdings are changed each year. The industry average for a U.S. stock fund is 100%, according to Morningstar.

“If you had a one- or two-year view, I don’t see how you’d buy anything right now because earnings outlooks are so low,” added Ian Lapey, senior member of the investment team at Third Avenue Value.

Mr. Lapey said his fund holds a stock for about five years on average, and historically has had a turnover rate of 10%, though partly because of redemption requests last year that figure has climbed to about 20%.

Investors should have at least one contrarian-style fund in their portfolio, Morningstar’s Mr. Kinnel said. “It can lead you to profitable investments,” he added. His favorites include Third Avenue Value and FPA Capital Fund (FPPTX), which is up 18% this year after falling 35% in 2008.

FPA Capital’s manager Bob Rodriguez, however, plans a “one-year sabbatical” from the fund beginning in January. Mr. Kinnel also suggested FPA Crescent Fund (FPACX) as a similar fund but one whose manager, Steven Romick, has no plans to leave. FPA Crescent lost 21% in 2008 and is up 7% so far this year.

Some of the stocks picked by the managers live up to a contrarian billing: Bank of America, New York Times and Ford Motor.

Mr. McGinn said he likes Bank of America in part because the shares are being valued “in crisis mode” and not according to true worth. “They have the biggest wealth manager and the biggest originator of mortgages,” he said. He added that once he had decided the bank wouldn’t be nationalized, its price looked cheap.

Keep in mind, however, that contrarian investing is no guarantee of success — as last year’s results for some funds prove.

“Each manager is different, but these guys can get it wrong, too,” Mr. Kinnel said. Not just wrong, but spectacularly wrong. “They buy stocks thinking things can’t get worse,” said the Morningstar analyst, “but last year was such a bad year that areas such as financials, and other cyclical names, kept getting worse.”

Bill Ackman To Make Case For Changing Target Board

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One of Wall Street’s most high-profile investors is focusing his firepower on Target Corp., whose flailing performance in the recession has left it with a big bull’s eye on its back.

Hedge-fund mogul Bill Ackman has called a meeting in Manhattan Monday to introduce his slate of five dissident directors — including himself — that he is asking shareholders to elect May 28.

Mr. Ackman says his candidates will bring new ideas to the discount retailer and relevant expertise to a board he describes as slow to make critical decisions. “We’re not talking about revolution, but evolution,” he said in an interview. “We think we can make the company better.”

Not long ago, the challenge would have drawn little interest; Minneapolis-based Target was a darling of investors, out-selling rivals such as Wal-Mart Stores Inc., which struggled to copy Target’s cheap-chic clothing and eye-catching ads.

A 58% plunge in Target’s stock from September to March might make it easier for Mr. Ackman and his Pershing Square Capital Management to grab the attention of unhappy shareholders eager for change. Despite a recent rebound that has lifted the stock of most retailers, Target shares remain down more than 39% from their peak of about $70 in July 2007.

One weapon Mr. Ackman is deploying in the proxy battle is Wal-Mart, which has managed to post relatively robust growth despite the recession.

In past downturns, Target’s sales gains have trailed Wal-Mart by a percentage point or two, but since autumn that spread has widened to up to six percentage points. Some retail analysts have pointed out that Target’s business began to slow before the recession, evidence that, among other things, some competitors that copied its low-priced designer strategy might be stealing its thunder.

“Since the fourth quarter of 2007, Wal-Mart has outperformed Target on key operating metrics, including growth in retail revenues, same-store sales, and earnings per share,” Mr. Ackman wrote in a May 1 letter to Target shareholders promoting his board slate. On Thursday, Wal-Mart announced its U.S. discount-store sales in April shot up by 5.9%, while Target reported an anemic 0.3% rise.

Mr. Ackman has had some success in previous board battles. In 2006, he helped convince Wendy’s International Inc. to sell off its Tim Horton’s doughnut and coffee chain. In 2007 he tried to oust the entire board of Ceridian Corp., a payroll company, and replace it with an alternative slate. Pershing Square agreed to a compromise that gave it four seats on the board; Ceridian later was sold to buyout firm Thomas H. Lee Partners and insurer Fidelity National Financial Inc.

Target is taking Mr. Ackman’s proxy battle seriously. It has slammed him in a flurry of news releases and letters to shareholders, and defended its board, which includes former executives of General Mills Inc., Quaker Oats Co. and the current chair of Wells Fargo & Co., as having all the right experience to guide the company.

Target Chief Executive Gregg Steinhafel contends Mr. Ackman’s bid for board seats is a ploy for short-term stock gains. The activist’s proxy fight in Target, he wrote in a May 6 letter to shareholders, “is not aligned with our other shareholders.”

Standard & Poor’s Ratings Services recently described the battle, which Target figures will cost it more than $11 million, as “a distraction” for the retailer’s management and board.

Mr. Steinhafel argues a turnaround is already under way. Target is expanding its grocery offerings to more stores, and retooling its advertising campaign to emphasize low prices. “Getting better at what we do is our No. 1 priority,” Mr. Steinhafel said in an interview.

The Target strategy seems to be too little, too late to satisfy Mr. Ackman. He dedicated one of his hedge funds to Target’s stock, and lost $1.6 billion of investors’ money, forcing him in February to apologize for the fund’s “dreadful” performance over the previous two years. Today, according to his proxy material, his funds own about 3.3% of the company’s 752.3 million shares outstanding, and call options on an additional 4.5%.

After two years of prodding Target to change its business strategy, Mr. Ackman in March launched his proxy battle. His nominees include Jim Donald, former chief executive of Starbucks Corp. and a longtime supermarket executive; Richard Vague, who has run major credit-card firms; Michael Ashner, chairman of Winthrop Realty Trust, and Ronald Gilson, an expert in corporate governance who teaches at the law schools of Stanford University and Columbia University.

Last year, Mr. Ackman successfully pushed Target management to sell a stake in its credit-card portfolio, and he’s still insisting it unload the rest. Target has signaled it is willing to do so when the time is right. But he wasn’t able to convince Target management to spin off land it owns under its stores to create a publicly traded real-estate investment trust. Target deemed the move too costly, and said it could undermine the company’s credit ratings.

How investors will respond to Mr. Ackman’s proxy challenge remains to be seen. The two major firms that advise institutional investors on proxy votes, Risk Metrics Group and Proxy Governance Inc., said they will issue recommendations later this week.

But some shareholders are receptive. Wayne Kozun, manager of the Ontario Teachers’ Pension Plan, which has assets of $85 billion (Canadian) and a small holding in Target, says he thinks Mr. Ackman’s board candidates have a shot at succeeding.

“I just think it is good to see shareholders have more choice,” said Mr. Kozun, who added that his fund has not yet decided how it will vote.


Note: To view webcast of Bill Ackman’s town hall meeting go to at 11 am ET today.