by Serge Berger | January 23, 2014 1:15 pm
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.
Click to Enlarge Activist Investor: Carl Icahn (Icahn Enterprises)
First on this list is Apple (AAPL), where likely the most famed activist investor of them all, Carl Icahn, continues to build a significant stake in the company’s stock.
Icahn has been involved in AAPL stock for some time now, and just yesterday said that he has bought an additional $500 million worth of Apple shares during the past two weeks. Reportedly, this puts Icahn’s current stake in AAPL stock at more than $3 billion.
Icahn’s basic request is that the company does more with its big pile of cash, preferably through buybacks.
On the chart, while AAPL stock hasn’t done much over the past few weeks of trading, it does remain bullishly positioned — as long as it can remain above the $500 mark in the medium term (blue box on chart), and above $540 in the immediate term. AAPL stock has a huge market capitalization and a big following, making it more difficult to influence change for an activist, but Icahn does have a good track record.
Click to Enlarge Activist Investor: Paul Singer (Elliott Management Corp.)
Next on my list is network infrastructure solutions provider Juniper Networks (JNPR).
Juniper Networks made headlines on Jan. 13 when activist hedge fund Elliott Management Corp. announced that it has accumulated a 6.2% stake in JNPR stock. The hedge fund is looking to push Juniper into stock buybacks and cost-cutting programs, and also is seeking talks with management as well as its board.
On the chart, Juniper’s rally after the announcement has firmly broken it past a 12-month-long resistance line and into an area of attraction (see the blue zone on the chart). While potentially near-term overextended, JNPR stock does look to have support for a move toward the low $30s.
Click to Enlarge Activist Investor: Daniel Loeb (Third Point LLC)
This final stock is one that I also discussed in Wednesday’s Beat The Bell column: namely, Dow Chemical (DOW).
Earlier this week Daniel Loeb — the activist investor and hedge fund billionaire of Third Point LLC — announced that he has amassed a stake in the DOW stock, making it Third Point’s largest investment at the moment. As I wrote on Wednesday:
“Loeb is calling for a spinoff of Dow’s petrochemicals business, which in his eyes would improve the company’s profitability. He’s also asking DOW to consider a big share buyback that would in essence help to offset a convertible bond deal whereby Berkshire Hathaway (BRK.B) and the Kuwait Investment Authority will get issued a large amount of stock.”
Loeb has a good track record, and in this case. the management of DOW initially doesn’t seem too opposed to his suggestions. If I combine this with the fact that DOW stock recently began to break out of a massive inverse head-and-shoulders formation, I like trading DOW from the long side as well — particularly after it consolidates its recent gains somewhat and more developments from Loeb and DOW come to light.
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Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.
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