How To Front Run Activist Investors

How To Front Run Activist Investors
Image source: CNBC Video Screenshot

Bloomberg has an interesting article on identifying activist targets before they are targeted. It’s a great idea, and exactly the same reason for the existence of Acquirer’s Multiple:

Investors love to follow activist money managers who take big positions in a company, often get on the board and then lobby for changes that make the stock rise.

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Investing alongside powerful activists like Carl Icahn, Pershing Square’s Bill Ackman, Trian Partners’ Nelson Peltz or Barry Rosenstein of Jana Partners can produce big profits.

One problem with riding the coattails of activists is that their stocks rally sharply the second it becomes known that they have big positions in companies. So you miss out on a lot of their gains.


What if you could predict what stocks they are going to buy, and get in before them? Then you could enjoy even bigger gains. That’s impossible, short of employing mind readers or spies inside their offices, right?

Well, maybe not. Instead of mind readers and spies, you could use a system that helps you buy companies with the qualities activists look for. Then wait for them to come on board, announce their positions and their big plans for change — and enjoy the ride from the start.

This might be easier than it sounds. Indeed, the above scenario plays out often enough for Mark DeVaul, a value investor who is a portfolio manager at The London Co. DeVaul, who helps manage the Hennessy Equity and Income Institutional Fund doesn’t actually set out to find companies that activists are going to buy. But his system puts him in stocks that activists end up getting involved with, and it has a good record. It outperforms the broader stock market.

Here are the basics: DeVaul favors companies trading at a 30% to 40% discount to intrinsic value, by his calculation. He likes to see strong balance sheets, meaning solid cash flow, plenty of cash and little debt.

“We believe these companies could create value by optimizing their balance sheets,” says DeVaul.

They have room to take on low-cost debt to buy back stock, which lowers their cost of capital and boosts earnings per share, all else being equal. “We also look for hidden assets on the balance sheet, or smaller divisions that could be sold off,” says DeVaul.

It turns out that activists are on the same trail. “We cross paths with activists often because they are looking for the same balance-sheet strength and hidden assets,” says DeVaul. “Activists often see the same things we do.”

A few big hits, thanks to activists

Here are some recent examples of stocks that DeVaul owned before activists got involved — to his benefit.

MeadWestvaco, where Peltz’s Trian Fund and Starboard Partners got active, encouraging the company to spin off divisions. What remained was eventually sold. The total return from late 2012 was over 50%.

Tempur Sealy where H Partners Management got active in early 2014. They eventually ousted the CEO, and the total return on the stock since early 2014 is over 40%.

Energizer Holdings where Jana Partners got involved at the beginning of 2012. The company was split in two earlier this year, when the personal-care-products unit was spun out to form Edgewell Personal Care helping to create gains of over 50%.

But that’s the past. What about the future?

Click here to read more: How to beat activist investors at their own game – MarketWatch

Alternatively, you can get a free list of deep value stocks likely to be targets on The Acquirer’s Multiple.

Buy my book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover or Kindle, 240 pages, Wiley Finance) from Wiley Finance, Amazon, or Barnes and Noble.

Here’s your book for the fall if you’re on global Wall Street. Tobias Carlisle has hit a home run deep over left field. It’s an incredibly smart, dense, 213 pages on how to not lose money in the market. It’s your Autumn smart read. –Tom Keene, Bloomberg’s Editor-At-Large, Bloomberg Surveillance, September 9, 2014.

Click here if you’d like to read more on Deep Value, or connect with me on Twitter, LinkedIn or Facebook. Check out the best deep value stocks in the largest 1000 names for free on The Acquirer’s Multiple.


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My name is Tobias Carlisle. I am the founder and managing member of Eyquem Investment Management LLC, and portfolio manager of Eyquem Fund LP. Eyquem Fund LP pursues a deep value, contrarian, Grahamite investment strategy based on the research featured in Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (hardcover, 288 pages, Wiley Finance, December 26, 2012), and discussed on Greenbackd. I have extensive experience in activist investment, company valuation, public company corporate governance, and mergers and acquisitions law. Prior to founding Eyquem, I was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions I have advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam, ranging in value from $50 million to $2.5 billion. I am a graduate of the University of Queensland in Australia with degrees in law and business (management). Contact me I can be contacted at greenbackd [at] gmail [dot] com. I welcome all feedback. Connect on LinkedIn, where we’re Friends.

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