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Brookdale: Sandell Asset Activist Target

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Cheap Stocks with Catalysts are the Key to Outstanding Investment Returns by TMFDeeJ aka Jason Knapp

Value investors are constantly on the lookout for cheap stocks. Special situation investors are a special subset of the value investing clan. For them, the fact that a stock is cheap is not enough to encourage them to buy it. For special situation investors, there must be some sort of catalyst that will theoretically cause the stock to become less cheap in the future, resulting in significant gains…cheap with a catalyst. The recent rise in activist investors has made the job of independent special situation investors easier to a certain extent. Rather than just finding cheap stocks and crossing one’s fingers that a company’s entrenched management will to something that might involve splitting up their fiefdom to unlock value, activists agitate change.

Now that I have finished my series of posts on Special Purpose Acquisition Companies, I plan on writing a series on companies that have this sort of value releasing catalyst. The first such company that I am going to talk about is Brookdale Senior Living $BKD.

Readers of this blog are no stranger to the name. Back in April I did a brief write-up on the company, It’s Time to Draft Brookdale Senior Living $BKD for Your Portfolio. Several months have passed since then, which puts us that much closer to what I believe is an inevitable move by the company that will boost its stock. This move will likely involve some sort of monetization of the company’s real estate assets. While I have been of the opinion for some time that Brookdale will likely sell its real estate to an existing REIT, many still believe that the company will instead spin off its real estate into a REIT of its own. Just today, The Street.com published an article stating its case for a spinoff: A Brookdale Senior Living Real Estate Spinoff Seems Inevitable.

For sometime activist investors, including Sandell Asset Management, have been pushing Brookdale’s previously stagnant management team to make shareholder-friendly moves. While the company did announce that it is reviewing its options, nothing material has come of this review yet. That may change in the near future. In March 2016, the activists who are involved with the company can nominate new candidates for $BKD’s board of directors. Such a deadline may put pressure on the company’s current board to make a value-enhancing move before then. If nothing happens before that date, I personally plan to vote my shares for any representative that the activist funds involved nominate.

In addition to the aforementioned bullish article, an equity research analyst at Jefferies Maintains published a positive note on Brookdale yesterday. The firm maintained its “Buy” rating and $46.00 price target (vs. today’s $36) on the stock, stating the following:

We walked away from last week’s company meetings with the sense that BKD is still going through its strategic review process. While we continue to believe that some sort of transaction will occur for BKD before year-end, it is also our view that investors can make money on the stock from the $36 level whether or not the Board decides to do anything strategically given BKD’s solid 2-4 year outlook and presence of other potential activist investors in the name.

I personally would be happy with either a spinoff or a sale of the real estate. I already have a position in Brookdale, but with a near-term catalyst like the monetization of the company’s real estate assets likely and a solid demographic tailwind in the form of an aging U.S. population I will likely add to that position in the near future.