Why invest in potential activist investor targets? The answer is that prices can spike fast on news of activist investors ramping up a stock holding. Unlike long-term execs, activist investors are usually happy to make drastic changes to try and turn a stock around.
Recently we have seen a number of big activist plays. In April shares of Whole Foods (WFM) rose nearly 10% following an SEC filing that revealed Barry Rosenstein’s Jana Partners had a 9% WFM stake. Jana, labelled a “greedy bastard” by WFM’s CEO, made millions by swiftly selling its WFM shares after the Amazon takeover. Meanwhile billionaire Nelson Peltz of the $13.33 billion Trian Fund Management is carrying out the biggest proxy fight in history against consumer giant Procter & Gamble.
So where will activist investors pounce next? TipRanks covers over 200 hedge fund managers, 5,000 stocks and tracks over 4,600 Wall Street analysts. From this extensive database, we swoop in and look at three stocks attracting activist attention right now:
In the last few days, shares in pharma giant Teva (NYSE:TEVA) have crashed from $31.25 to just $18.29. Prices dropped on a multiple of bad news- including lower-than-expected earnings results, guidance and dividend payments. For example, Teva cut its previous EPS guidance of $4.90-$5.30 to just $4.30- $4.50.
Top Mizuho analyst Irina Rivkind Koffler commented, “The weakness was attributed to a number of factors in the generics business including pricing pressure, decreased volumes, competition, and delayed launches.”
With prices so low, the company is now looking vulnerable to hedge fund activists. However, Teva’s massive $35 billion debt burden means that activists may struggle to find a willing buyer. It is more likely that an activist investor would choose to ramp up its shareholding in TEVA and begin demanding changes in strategy and management. The first the market will hear about it is from SEC Filings. If a stake hits over 5%, the activist has 10 days to file a form 13D with the SEC.
Indeed, Teva’s board has received plenty of criticism from shareholders so it would be relatively easy for an activist investor to find the requisite shareholder support for a board mix-up. For example, the company’s largest active private investor, Benny Landa, has been very vocal in his belief that “the company board of directors is incapable of making big decisions and getting the company back on track.” He says the directors are sabotaging efforts by the company chairman to attract a CEO with a strong international reputation.
Also note that Allergan (NYSE:AGN) owns a stake of just under 10% in Teva. These shares are no longer restricted so Allergan will be free to sell them if it chooses- or it may prefer to wait and try and improve the company’s fortunes first.
2. General Motors
Detroit-based General Motors (NYSE:GM) pulled off a stunning victory against David Einhorn’s $7.19 billion Greenlight Capital fund at the beginning of June. Over 90% of shareholders voted against Einhorn’s plan to split shares and his director nominees, despite an aggressive two-month campaign. “We are disappointed that shareholders have elected to maintain the status quo. We congratulate GM’s management on their win today” Einhorn said at the time.
But five-star Deutsche Bank analyst Rod Lache says the game is not over, especially as GM remains one of the cheaper stocks in the S&P 500. He believes that, instead of the two share-system proposed by Einhorn, the stock may face pressure from activists who want to spin off faster-growing units. According to Lache:
“Asset spin-offs seem to be more likely. The Universe of Active Growth Investors is much larger than that of Active Value Investors. We see this every day based on the number of incoming calls on “Growth Suppliers” vs. inquiries regarding Cyclical Suppliers or Automakers. This is also evident in valuations. And we believe that this will ultimately be recognized by GM, Lear (LEA), and others with undervalued growth assets. It would not be far-fetched to say that there are significant parts of $50 bn (market cap) Tesla (TSLA), $70 bn Uber, and $15 bn Mobileye (MBLY) inside of GM.”
Struggling tech company IBM (NYSE:IBM) is also looking increasingly like a potential activist target. The stock is currently trading at just $141.85- a huge fall from prices five years ago of over $200. Year-over-year sales have now declined for the 21st consecutive quarter.
Warren Buffett (who is generally against activist investing) recently sold a third of his stake in IBM. This could pave the way for an activist investor to step in. And according to The Deal, IBM has also reportedly hired two investment banks to strengthen its defenses against activist change.
Top Goldman Sachs analyst James Schneider recently reiterated his hold rating without a price target following poor earnings results. He says: “We expect the stock to trade down modestly post another tepid revenue quarter, as the weak performance in Services and the slowdown in Strategic Imperatives are likely to drive continued investor skepticism around IBM’s progress in transitioning its franchise.”
Also keep an eye on: department store chain Dillard’s (NYSE:DDS). Activist Snow Park Capital Partners is targeting DDS because even its real estate value is much higher than the current share price.