Two weeks ago we did a comprehensive follow-up on our Advance Auto Parts (AAP) position. Now, the Wall Street Journal just broke a story that Dan Loeb’s Third Point had accumulated a large activist stake in AAP and gained three seats on the Board. The stock jumped, but I think the move has barely begun, explains Tom Hayes, editor of Hedge Fund Tips.
Now you might say, “Wow, that was lucky Tom!” But I would not attribute it to luck for two reasons:
First, the move has barely begun because as with most positions, these have multi-year time horizons. The exception is when we hit intrinsic value well ahead of target (less than a year) like several names last year. Those are exceptions, not the rule.
Second, good things happen when you buy high quality assets at low prices. If you learn nothing else from me, that is the #1 lesson. Not only did activist Dan Loeb come into AAP after us, but it has happened over and over in the last couple of years:
The Walt Disney Co. (DIS) – Peltz and ValueAct came in after us.
V.F. Corp. (VFC) – Engaged Capital and Legion Partners came in after us.
Crown Castle Inc. (CCI) – Paul Singer and Elliot Management came in after us.
Four positions (out of a very concentrated portfolio) had billionaire activists see what we saw – aka “Price is what you pay, value is what you get” – and entered the same companies after us.
Success leaves clues and these folks didn’t become wealthy trading “zero day options” or analyzing “squiggly lines” to get a perceived edge.
The only difference they bring to the table is they can tilt the scales faster to turn the “short-term (emotional) voting machine” of irrationally low prices to the “long-term (fundamental) weighing machine” of fairly/fully valued prices by agitating management to make changes more expeditiously through public pressure.
We get the benefit of riding their coattails while they pay Willkie Farr $2,000/hour to draft threatening letters to the Board and foment change. This is not dissimilar to the “Predator’s Ball” days of the 1980s. The only difference is that in the 1980s, activists got the whole company. Now they just get a few Board seats!
Recommended Action: Buy AAP.
