The number of activist investors filing schedule 13D forms is rising, and their efforts are becoming increasingly sophisticated and ambitious. In fact, in 2015, the amount of activist campaigns as well as the scale and renown of their targets reached new levels.
And there’s no end in sight to this trend.
According to an article published by the Harvard Law School Forum on Corporate Governance and Financial Regulation, we have not yet reached a peak in activist investing and it will continue to evolve in the coming years.
This is good news for individual investors who are willing to check Schedule 13D filings at the Securities and Exchange Commission’s website to open a whole new source of potentially profitable investment ideas.
The following are three stocks that could be resurrected by recent schedule 13D filings.
Activist Investor Targets: Build-A-Bear Workshop, Inc (BBW)
Cannell Capital is a Wyoming-based activist investor run by its namesake J. Carlo Cannell. Recently, the firm filed a 13D announcing that it now owns 5.09% of Build-A-Bear Workshop, Inc (BBW).
The firm attached a letter that claimed it had no confidence in the current board and accused the company of poor governance. According to the firm, Build-a-Bear granted new compensation agreements with unnecessarily rich employment and severance agreements.
Cannell Capital told the board that the clock was ticking and it is prepared to take whatever steps are necessary to protect and unlock shareholder value. The stuffed animal retailer has seen its stock price fall by nearly 37% in the last year and its current price-to-earnings ratio is just 7.9.
A successful activist campaign could send the stock price back up towards its old highs above $20 a share.
Activist Investor Targets: RPX Corp (RPXC)
Mangrove Capital is a value-oriented investment firm based in the Cayman Islands that frequently takes an activist stance. The firm recently filed a 13D announcing a 5% ownership stake in patent management and protection firm RPX Corp (RPXC).
Mangrove attached a letter informing the board of the following:
“We believe that shareholders should decide whether they want the current regime to continue guiding the Company or whether it is time to elect a new set of fiduciaries. From our perspective, change is desperately needed, and we have therefore nominated three directors for election to the Company’s Board of Directors.”
In it’s letter, the firm also points out that RPXC has generated $165 million in free cash flow over the last five years, but only repurchased $26 million of stock. On top of that — it hasn’t paid any dividends. Adding insult to injury, growth has slowed to almost 0% in the core subscription product 0% and investments by current management have not delivered any positive results.
The stock has fallen by over 58% since its IPO in 2011, but a successful campaign by Mangrove Capital could lead to strong share appreciation.
Activist Investor Targets: Benchmark Electronics, Inc. (BHE)
Activist investor Engaged Capital delivered proxy materials to Benchmark Electronics, Inc. (BHE), announcing that they plan to nominate three directors to the board. Engaged Capital owns 4.9% of the company and has expressed concerns about the company’s undervaluation and dismal shareholder returns.
In their proxy statement, Engaged Capital included a letter to shareholders that expressed frustration with their attempt to work with Benchmark’s current board:
“Our valid criticism was ignored, an insular Board refused to provide material information to shareholders and pushed through an unpopular transaction that we continue to believe constitutes a significant waste of shareholder capital. This episode is part of a bigger problem with this Board’s track record of undisciplined capital allocation decisions that as noted above have resulted in a worst-in-class ROIC and a discounted PE multiple relative to peers.”
Given that BHE is trading at less than book value and just 12 times earnings, it does appear undervalued. However, a new direction driven by the activists might help the shares reach a more reasonable valuation level.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities.
