When an investor or firm has taken a 5%-plus stake in a particular company with plans to take an active role, they must file a 13D to announce their position. Typically, the investor intends to engage with management and pushing for particular measures that will help improve shareholder value. That’s why I look through 13D filings at least twice a day.
Riding the coattails of activists can be very profitable, as they are often successful in spotting undervalued securities and forcing stock prices higher — often through large buybacks or the outright sale of the target company.
However, while large activist like Bill Ackman, Carl Icahn and Nelson Peltz make a lot of news with their filings, it can be difficult for individual investors to make money off their filings. Too many people follow them, and it is tough to get into the stock near the activists’ purchase price — the news of the buying often causes an immediate price pop.
I prefer to follow smaller activists that have piled up decent track records with small-cap stocks but who remain under the radar of most investors. While Icahn and Ackman pursue the spotlight many activists try to stay away from that kind of attention. This is especially true of these activist who specialize in small-cap stocks — particularly community bank stocks.
Community banks attend to be smaller and less liquid, and noisy announcements would work against activists’ efforts to quietly buy shares. Sterne Agee CRT, a brokerage firm that trades in community banks, found that most community banks experience an enormous outperformance after an activist files a 13D. The firm also found that about 29% of those community banks are eventually sold at a premium — which means big cash for the activist investors and anyone who follows them into these small-cap stocks.
2 Small-Cap Stocks to Buy
One of the most successful activist bank stock activist investors is Lawrence Seidman a former SEC attorney. He has been active in community banks going back to the mid-1990s, and he has a strong track record of forcing changes and even sales of community banks.
Seidman has gained board seats at several banks as well and used that position to encourage changes like buybacks, dividend increases and policy changes that helped to drive shareholder value higher. In the past couple of months he has filed a pair of noteworthy new 13D positions in small-cap stocks.
Mr. Seidman announced back in April that he owned 5.9% of ASB Bancorp Inc (NASDAQ:ASBB), a North Carolina bank with 13 branches and $771 million in assets. In his filing, Seidman said that he bought the stock because he considered it to be undervalued and that he has had conversations with management and intends to have more in the future.
The North Carolina marketplace has seen substantial consolidation activity in the past year and many analysts expect it to increase in both 2015 and 2016. ASBB stock is currently trading at just 89% of book value and the average takeover multiple right now is 1.35 times book value, so a deal to sell the bank could provide outsize returns for investors who follow Seidman into the trade.
Seidman also announced a 5.03% stake in Wisconsin-based Westbury Bancorp Inc (NASDAQ:WBB). This bank has 9 branches and about $600 million in assets; the balance sheet is solid, as is the loan portfolio.
Westbury just announced its fourth buyback program and intends to repurchase 200,000 of its issued and outstanding shares, representing approximately 4.5% of the bank. With WBB stock trading at 94% of book value, the upside in the event of a takeover based on average multiples is more than 40% of the current price.
Bottom Line: Following the larger activists makes for a good story and lots of press coverage. But tracking the smaller players could end up leading to substantial profits for patient, long-term investors.
As of this writing Tim Melvin is long WBB and ASBB. He is the author of the Banking on Profits newsletter covering the community bank stock opportunity and the Deep Value Report that seeks out undervalued stocks that are likely to survive until they thrive and capture the value effect that has been proven to beat the market over time.
