Activist investing continues to gain advocates—and capital—as high-profile managers train their sights on underperforming targets, explains Stephen Biggar of Argus Research.
According to Hedge Fund Research (HFR), assets under management in activist funds have almost quadrupled since 2008.
Why are assets growing? Activists are achieving successful results. In 2015, activists were able to get management to address their demands 69% of the time, up from 66% in 2014, according to the Activist Insight annual review of 2015.
Typically, in 2015, activists went after board seats, sought M&A activity, targeted the balance sheet or pushed for operational improvements.
However, despite the success, the performance of the targeted stocks was not as strong as in years past.
The Activist Insight Index, compiled from more than 30 activist funds, was down more than 3% after fees through the first three quarters of 2015.
This compared to returns in 2014, when HFR’s Activist Index generated a 5.2% return, compared to a 3% return for the broad HFR Weighted Composite Index. Three- and five- year comparisons through 2014 were favorable as well.
We keep a close eye on the activists and the stocks they like. The analysts at Argus Research is teamed with the data analysts and programmers at Vickers Stock Research and the portfolio strategists at Argus Investors Counsel.
Together, they have designed an analytical process that identifies value stocks which may be poised for outperformance because activist investors have built substantial positions in the companies.
The process starts with the stocks in the S&P 1500. We first cut the index into its three constituents: The S&P 500 of large-caps; the S&P 600 index of small-caps; and the S&P 400 index of mid-cap stocks.
For each individual index, we sorted for bottom performers by sector. These value screens deliver a list of 450-470 deep-value names.
The next step is to analyze the activists. In 2014, more than 275 activist campaigns targeted a change in company strategy or board composition, according to FactSet SharkWatch.
That was up almost 60% from 2009 — and activists won more than 70% of their battles.
To isolate the impact of activist investors, we maintain a dynamic list of major activist investors out of the Vickers database of over 9,000 institutional portfolios.
The list was compiled through a systematic survey of 13-D filings, hedge fund databases, news stories and Argus Research’s team of analysts.
On average, our top-ranked activists own a concentrated 26 stocks in their average $10.6 billion portfolio.
Our next step was to gather the portfolios of these investors from Vickers, and then to rank the stocks — more than 1,100 of them — on activist criteria.
We focus on depth of ownership; breadth of ownership; and timeliness of ownership.
We then combined the two lists to arrive at a final group of stocks that exhibit potentially powerful characteristics for stock performance: attractive valuations with an activist trigger for outperformance.
The list of the stocks that met both criteria last year, and are currently included in the Argus Turnaround Strategy Portfolio, are displayed below, including the activist investor involved:
AECOM (ACM) — Greenlight Capital
Allscripts Healthcare Solutions (MDRX) — Blue Harbour Group
American Express (AXP) — ValueAct Holdings
Amgen (AMGN) — Third Point
Anadarko Petroleum (APC) — Elliott Management
Bank of New York Mellon (BK) — Greenlight Capital
Citigroup (C) — Carlson Capital
Diamond Foods (DMND) — Oaktree Capital Management
E. I. du Pont (DD) — Trian Fund Management
Franklin Resources (BEN) — Southeastern Asset Management
General Electric (GE) — Trian Fund Management
General Motors (GM) — Greenlight Capital
Hess (HES) — Elliott Management
Johnson Controls (JCI) — Jana Partners
Laboratory Corp. of America (LH) — Glenview Capital Mgmt.
Loews (L) — Southeastern Asset Management
Michael Kors (KORS) — Greenlight Capital
Microsoft (MSFT) — ValueAct Holdings
Mondelez International (MDLZ) — Trian Fund Management
Owens-Illinois (OI) — Atlantic Investment Management
PepsiCo (PEP) — Trian Fund Management
QUALCOMM (QCOM) — Jana Partners
Rackspace (RAX) — Blue Harbour Group
Rowan Companies PLC (RDC) — Blue Harbour Group
Starwood Hotels & Resorts Worldwide (HOT) — Paulson
Sysco (SYY) — Trian Fund Management
Yahoo! (YHOO) — Starboard Value
Yum! Brands (YUM) — Corvex Management
Zoetis (ZTS) — Perry Corp.
Meet Stephen Biggar at the upcoming Las Vegas Money Show, May 9th-12th. Thd director of Arugs Research will be discussing his favorite dividend ideas and his firm’s top investment themes and stocks. Register here.
By Stephen Biggar of Argus Research.
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