While there have been some rumblings that 2015 was the peak of activist investing, a recent blog post at the Harvard Law School Forum of Corporate Governance would indicate otherwise:
“While many pundits have suggested shareholder activism peaked in 2015, shareholder activism continues to be a major factor in the marketplace, involving companies of all sizes and activists new and old.”
So, a successful activist campaign can unlock shareholder value, resulting in substantial profits for investors who ride the coattails of activists.
While investors pay attention to the big 13D filings by superstar investors like Carl Icahn and Bill Ackman, individual investors can probably make more money by focusing on activist filings by smaller funds off the radar of both the media and Wall Street.
Activist Coattails: Outerwall Inc (OUTR)
Engaged Capital is an activist firm founded by Glenn Welling, a former partner at Relational partners. The firm recently filed a 13D announcing 14%-plus ownership in Outerwall (OUTR).
OUTR stock has fallen by more than 50% in the past year on concerns over the fading popularity of DVDs hurting the firm’s RedBox kiosks.
According to a recent Reuters article, Engaged Capital would like to see the firm sold to private equity buyers. The company has turned down three such offers at higher prices in recent years that are said to have been as high as $90 a share.
Outerwall’s stock trades with an EV/EBIT ratio of just 5.9 and generates $326 million of free cash flow, so a buyout deal could add substantial value to the current stock price.
Activist Coattails: Forestar Group Inc. (FOR)
For more than a year now, activists have pressured Forestar Group (FOR) to take steps to unlock the value of its assets.
Two activist firms in particular — Cove Street (owns 9.4%) and Carlson Capital (owns 8.6%) — have repeatedly stressed that the sum of Forestar’s parts — real estate, oil and gas, and other natural resources — are worth far more than FOR stock trades for at current prices.
Forestar has taken several steps in recent months to opportunistically exit its multifamily portfolio and sell its oil and gas assets, as well as the Radisson Hotel and Suites it owns in Austin, Texas.
Both activist firms recently gained two board seats and will be working with management on plans to increase shareholder value.
The remaining real estate development and natural resources business could be worth a great deal more than the current stock price.
Activist Coattails: PICO Holdings Inc (PICO)
Activists have been pressuring PICO Holdings (PICO) to make changes at the management and board level to increase the value of PICO stock.
In particular, activist firm Central Square recently sent a letter to the board of directors that said in part:
“Should our concerns and requests continue to fall on deaf ears, we will be left with no choice but to nominate candidates to the Board at the upcoming annual meeting so that shareholders can be offered a choice between the current path, which we believe is characterized by self-entrenchment and value destruction, and an alternative path that we believe would create significant value for all shareholders through accountability driven by highly qualified Board oversight.”
PICO has a collection of water resource and water storage, real estate and agribusiness assets that should be worth far more than the current valuation. A successful activist campaign would result in a substantially higher PICO stock price.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities. 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.
