Activist investors can be strong catalysts for a company’s stock, so by watching activist investors, you actually can come across a few decent stocks to buy.
Activist investors by definition purchase a meaningful amount of a public company’s outstanding float of stock, and by doing so, try to influence predetermined change in a company. Additionally, some activist investors try to obtain seats on a company’s board for the same reasons. The general thought bandied about by these activist investors is that their targeted companies usually have an excessive cost structure or some other result of mismanagement that, if resolved, could unlock more profitability.
Because of their abilities, some activist investors have over time gained rock-star status. However, because of their brash style, many are generally disliked.
I have found that in some situations — particularly when the suggested change isn’t too controversial — the activist’s involvement can allow for good trading opportunities on the long side. But because at any given point there are many activist deals in the works, I prefer to focus on the bigger deals, inv0lving companies with otherwise solid businesses that I can understand and that have plenty of transparency.
Currently, I am closely watching three big-name deals involving big-time activist investors. In each of those deals, given the activist’s involvement, it is difficult to envision the underlying bid in the companies completely faltering, which makes them favorable stocks to buy.