Activist investors often take very large stakes in companies that are undervalued and then seek to force change and create catalysts that can unlock value for shareholders. The presence of an activist investor can be a real boost for smaller shareholders because large stakeholders can usually afford to mount a serious campaign and in many cases, bring new awareness and a sense of urgency to management who might not otherwise act. As an example, Carl Icahn is one of the most successful activists and he has made many smaller shareholders lots of money when they followed his lead in buying stakes in the companies that he gets involved with. Let's take a closer look at a company Carl Icahn is targeting now, along with a couple other interesting plays with highly-experienced activist investors involved:
Firsthand Technology Value Fund (NASDAQ:SVVC) is a closed end fund that is trading at a major discount to net asset value, which was last reported (on March 31) to be at $23.26. However, a significant rise in the stock market has likely raised that value to much higher levels. In particular, stocks like SolarCity (NASDAQ:SCTY) which is a major holding of this fund have nearly tripled in value since net asset value was last calculated. In addition, about 9% of this fund is invested in Twitter which could be the next high-profile IPO. This fund is also invested in Facebook (NASDAQ:FB) and some lesser-known, but very interesting technology companies.
Firsthand owns stakes in a few promising pre-IPO companies like Gilt Group which is a fast-growing, members only "flash-sale" website that offers luxury products. It also owns a stake in "Tapad" which is a company that offers tracking technology that works across multiple devices like desktops, tablets and smartphones. This company was founded by CEO Are Traasdahl, who has also started multiple fast growth tech companies like Thumbplay and others. Tapad was even highlighted in the June 10 issue of Forbes Magazine as a promising company. These and other investments show that this fund has been selecting some very good investments, however, a great deal of the fund remains in cash and it is trading at a significant discount. This has at least one activist investor looking for major changes and that could be a significant upside catalyst in the near-term.
Bulldog Investors has accumulated a stake of over 9% in this fund and it has started a campaign to force change and a "liquidity event" on the fund and current management. Bulldog Investors is a hedge fund run by Phillip Goldstein that has experience with activism in closed-end funds. The stake it has bought is worth nearly $20 million, and that carries a lot of weight. One issue is that Firsthand has nearly $16 per share in cash and with so much cash on the books, and with a large discount to net asset value, it's easy to see why something has to change. It makes no sense for an asset manager to be getting paid 2% or so, when so much is being held in cash. Bulldog clearly sees the upside potential and it appears very serious about finding a way for shareholders to get what these shares are actually worth which is much more than the $20 it trades at now.
One obvious solution would be for Firsthand to announce a special cash dividend as this would be a sensible way to please shareholders. The fund could easily afford to pay a special dividend of $10 or more and it would still have significant cash holdings for new investments plus the stakes in Facebook, Twitter, SolarCity, Tapad, and others. A more drastic "liquidity event" would be to close the fund by selling all assets and returning the proceeds to shareholders and that could potentially yield proceeds of about $25 per share, or more. However, a more likely scenario is for this fund to pay a substantial special dividend or for the share price to rise closer in line with the net asset value, which it has done in the past. In the long term, the portfolio holdings this fund owns could continue to rise, and the potential Twitter IPO could be another significant upside catalyst.
Here are some key points for SVVC:
Current share price: $19.70
The 52 week range is $15.40 to $19.83
Transocean, Inc. (NYSE:RIG) is one of the world's largest offshore drilling companies. However, the shares of this company have underperformed the major market indexes for the past few years. Transocean was unfortunately involved with the oil spill in the Gulf of Mexico and that uncertainty has lingered, although it appears to be diminishing over time. It seems that Carl Icahn and other investors see brighter days ahead for this stock and there are some positive signs.
Transocean had suspended the former dividend payments for a while, but on March 4, the board of directors proposed reinstating the dividend at the annual shareholders meeting on April 13, at a rate of $2.24 per share. The shareholders overwhelmingly approved this dividend policy and the shares are now yielding over 4%. The dividend is likely to create a floor under this stock since many investors are seeking income in a low interest rate environment. However, Carl Icahn who owns a stake of about 5.6% in Transocean could also help support this stock.
Mr. Icahn wanted an even larger dividend of $4 per share and new board members to be voted in during the annual meeting. He did not get the dividend rate he sought, but I doubt that "battle" is over and he did get one of his nominees appointed to the board while Transocean Chairman Michael Talbert was voted out. Transocean has a market capitalization of about $18.3 billion, so this means the 5.6% stake bought by Mr. Icahn is worth nearly $1 billion. That is a significant position and more likely than not, Mr. Icahn is going to continue pushing for shareholder-friendly changes that could serve as an upside catalyst. Mr. Icahn's involvement did seem to create some short-term "pops" in the stock, but with the shares back at about $50, it appears to be another buying opportunity.
Transocean stock looks cheap based on book value which is about $44.54 per share. It also appears undervalued based on the above-average dividend yield and the price to earnings ratio. Analysts expect the company to earn $4.45 per share in 2013, and $6 per share in 2014. That implies a PE ratio of just about 11 times earnings, while the average stock in the S&P 500 Index (NYSEARCA:SPY) trades at around 16 times estimates.
In spite of the apparent upside potential, downside risks remain. As mentioned before, Transocean was the operator of the Deepwater Horizon drill rig that exploded in the Gulf of Mexico and even though the company recently settled with the U.S. Government, it still has unresolved claims relating to this oil spill along with BP plc (NYSE:BP). However, the settlement with the U.S. Government takes a lot of litigation risk off the table for shareholders. Plus, the company is profitable now and it can look forward to potentially even higher profits as claims are settled over time.
Here are some key points for RIG:
Current share price: $50.23
The 52 week range is $39.32 to $59.50
Earnings estimates for 2013: $4.45
Earnings estimates for 2014: $6
Annual dividend: $2.24 per share which yields 4.3%
Procter & Gamble (NYSE:PG) is one of the world's largest manufacturers of consumer products. It owns and markets under many famous brands including Head & Shoulders, Olay, Pantene, Downy, Duracell, Tide, Braun, Gillette, and more. This stock already appears to have benefited from a shareholder activist named Bill Ackman, (who has purchased about a 1% stake in the company), but a recent pullback is giving investors another buying opportunity. The stock recently hit a new 52-week high of just over $82, but a market-wide decline in dividend stocks over interest rate concerns has pushed the shares down to about $77.
Mr. Ackman is a well-known investor who has been seeking changes at the company. He believes that Procter & Gamble shares could trade at $125 in the next couple of years, if the company focuses on boosting profits to about $6 per share. With many consumer stocks trading at about 20 times earnings, this seems perfectly reasonable. While this is a premium to the market in terms of PE ratio, investors have historically paid a premium for "brand name" stocks and in companies whose products they buy on a regular basis. Also, P&G is cutting costs and it has goals for about $10 billion in savings by 2016. This could help improve profit margins and make the $6 per share in earnings goal achievable.
Mr. Ackman has scored a recent victory as he pushed for changes and that seems to have resulted in a management shakeup. About one week ago, Procter & Gamble said that former CEO A.G. Lafley is returning as CEO and replacing Bob McDonald, effective immediately. Mr. Lafley, was CEO at the company from 2000 to 2009, so he is very familiar with the brands and the company. Analysts and investors hope that Mr. Lafley will be able to increase growth rates and that could power the stock higher in the coming years.
The company appears to have major growth opportunities in emerging market countries, and if Mr. Lafley succeeds in tapping those regions while reigniting sales in the U.S., it is easy to see how Mr. Ackman could be right about a $125 price target. Since P&G has a current market capitalization of roughly $210 billion, the stake Mr. Ackman has purchased is worth around $2 billion. That's a huge investment and even though management changes have been made, it's quite likely that this activist will continue to stay vocal and help remind P&G to remain aggressively focused on creating shareholder value.
This company pays a healthy dividend of $2.41 per share and that offers investors a yield of nearly 3%. P&G has raised the dividend every year since 1991. This steady increase each year has taken the dividend up about 10-fold from just 6 cents per quarter in 1991, to about 60 cents per quarter in 2013. That makes this an ideal stock for dividend growth.
Downside risks appear limited in many regards since this company has been around for about 175 years, plus it has a strong balance sheet and globally recognized brands. Still, there is always the chance of product liability issues, and for PE multiple compression. If the markets decline sharply, this stock could be at risk since it trades at around 19 times earnings, while the market average is just about 16 times earnings. With strong brands, coupled with a dividend yield that rewards investors every quarter, it makes sense to consider buying and holding Procter & Gamble shares along with Mr. Ackman, especially on market pullbacks.
Here are some key points for PG:
Current share price: $76.76
The 52 week range is $59.07 to $82.54
Earnings estimates for 2013: $4.04
Earnings estimates for 2014: $4.33
Annual dividend: $2.41 per share which yields 2.9%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I am long SVVC, RIG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.