This is the year of the activist investor, with wave-making fund managers picking fights with CEOs and prodding for corporate change at a rate of nearly two a week -- more than they have in years.
Activist investors have filed notice that they were stalking 62 companies with a market value above $100 million so far this year, up nearly 25% from 50 at this time in 2012, which itself was the busiest year for activists since 2008, according to research firm 13D Monitor.
The lavishly paid longtime chairman of Occidental Petroleum Corp. (OXY) was ousted after an activist campaign. Chemical producer Ashland Inc. (ASH) is under pressure to spin off its Valvoline oil division. And just last week, hedge fund Barington Capital began pressing Olive Garden and Red Lobster parent Darden Restaurants Inc. (DRI) to split its mature chains from its faster-growing divisions.
Most ordinary investors are satisfied to take what the market gives them, selecting funds and stocks that appear attractive and then let time and luck to their thing. Activist investors impatiently try to make their own luck, targeting underperforming or badly managed companies and agitating for change to liberate more value for shareholders.
Not passive, aggressive
Pressing for a big stock buyback, a larger dividend, spinning off a business, replacing top management or putting the company up for sale are all tactics the activist can employ. Lately, it’s been working. Darden shares are up 10% in the week since Barington filed notice of its stake. Air Products & Chemicals Inc. (APD) is up some 20% since right before Bill Ackman’s Pershing Square Capital disclosed its position in the company.
The stock of Icahn Enterprises LP (IEP), the public investing vehicle of graybeard activist Carl Icahn, has gained 78% this year. And the 13D Activist Fund (DDDAX) -- a nearly two-year-old, $100 million mutual fund run by activist-investing tracker Kenneth Squire that invests selectively in companies subject to activist campaigns -- is up nearly 29% year to date and about 28% annualized since its December 2011 inception. (A 13D is the category of SEC filing used by investors with at least a 5% stake and an intention to influence company management.)
This mutual fund, like most other investors who key off of activist investors’ moves, takes a position in stocks already subject to an activist push. Research has shown that shares of companies pursued by activists tend to outperform the market by a nice margin, on average, for more than a year after a 13D filing posts.
Yet this hasn’t stopped a Wall Street parlor game from developing, in which investors try to handicap what companies might someday attract the attention of an activist-investing mercenary or two.
This, in a sense, is the same as sifting for companies with a financial cushion, inefficient balance sheet, lagging margins, sputtering strategies or disparate businesses that might be spun off. So, even if no activist emerges, the stocks are usually conservatively valued, with low investor expectations and room for fundamental improvement.
Here are four companies that roughly fit the profile of a potential activist target. None is yet known to be in the sights of corporate agitators, but each has lots of cash relative to its market value, a slow competitive pulse, sleepy strategy or a share price that has lagged its peers.
Janus Capital Group Inc. (JNS)
This asset manager, one of the hottest fund families of the ‘90s bull market, has been marginalized in recent years, its fund assets roughly half of their $320 billion peak in the year 2000, its business overly reliant on its INTECH mathematical-investing subsidiary. Several years ago, sometime-activist firm Highfields Capital took a stake, but sold it, and there has been substantial turnover in the fund-manager and corporate-leadership ranks.
With cash equal to more than 12% of its $1.7 billion market value, which in turn is little more than 1% of its assets under management, Janus’ core business is not being valued nearly at what other asset managers fetch. While no activist whispers have emerged, if they did the idea might be to leverage the balance sheet to push more cash to shareholders, or even sell the company. Notably, the stock has become a magnet for opportunistic hedge funds this year.
American Eagle Outfitters Inc. (AEO)
The teen-clothing retailers have been a disaster. American Eagle, Abercrombie & Fitch Inc. (ANF) and Aeropostale Inc. (ARO) all have shares down more than 25% in the past six months. Strapped youth shoppers, tired styles and over-expansion has pressured each. The group almost resembles the office-retail sector of a few years ago, when three thriving competitors hit hard times.
Aeropostale is already being stalked by Sycamore Partners. American Eagle has $400 million in net cash, more than 15% of its $2.6 billion market value. Analysts have suggested it could be a leveraged buyout target. It would be little surprise if an activist tried to catalyze the value-unlocking process here.
Corning Inc. (GLW)
The venerable materials innovator is, by most accounts, a well-run and proud company, currently quite reliant on the display-screen business, which is rapidly becoming commoditized. The company is over-capitalized and, to management’s credit, is busy returning cash to investors through heavy buybacks and dividends, while working to diversify away from screens.
While it’s far from a broken company, the stock is up only 5% the past two years, and it has five distinct business units – along with the Dow-Corning joint venture – that an impatient investor might look to rationalize.
K12 Inc. (LRN)
K12, an online-education software provider to school districts and individual students and teachers, is a company with a lot of promise that stumbled badly recently. Its enrollment growth that was reported this month fell short of plans, in part due to procedural glitches, and the stock is down 40%.
With $150 million in net cash on a $680 million market value, the company could draw deal-minded activists or other aggressive players looking to sway its strategic direction.