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Summary

  • I use a multi-step process to search for companies that meet certain fundamental criteria, and have corporate governance issues.
  • I focused on those companies specifically that had a "red-flag" for takeover defenses.
  • After my running though my multi-step process, I found that four companies could be potential activist, or takeover targets.

In this article, I will be screening for stocks that could be the next activist target for famed activist investors like Carl Icahn (NASDAQ:IEP). I will be using a multi-step process to find a short-list of companies that could be possible activist targets. I combined fundamental criteria along with corporate governance data because Carl Icahn is well known for targeting companies with governance issues. For my search, I used the Fidelity stock screener to get my initial list of stocks using the criteria below.

Step #1: Stock Screen

I looked at the current portfolio of Carl Icahn and I looked at some of his past activist targets to see what the companies had in common that I could use in the screener. I found that his targets are most likely US based companies with a market cap between $5 billion and $20 billion, and have underperformed the market. After running, the screen with the criteria below my initial list was made up of 74 stocks before my eliminations.

Criteria

  • Market Cap: 5000 to 20000
  • Company Headquarters: USA
  • Exchange: Amex, NYSE, Nasdaq
  • Security Type: Common Stock
  • PE: >1
  • Price Performance 1 yr: <13% [I came up 13% with because I applied a 25% discount to the S&P 500 (NYSEARCA:SPY) performance of 17.29%.]
  • Forward EPS Long-term Growth: >5
  • Sector: Is not Financials or Utilities
  • Net insider shares bought : < =0
  • Short Interest: <10
  • Institutional Ownership: >60

Step #2: Eliminations

While I was in the screener I selected the criteria of "Days since new 52 week high/low" to see which companies have not made a new high within the last 6 months [182 days]. The reason I chose to do this was the market has repeatedly hit new high after new high this year, and stocks that have not been hitting new 52-week highs must have a reason for not doing so. I eliminated any companies that had made a new high within the last 182 days, and only included those that have not made a new high in the last 182 days, leaving my list at 36 companies. I then looked through the list to see if any of the stocks were currently owned by Carl Icahn or have been in the past so I ended up eliminating Clorox (NYSE:CLX), and Family Dollar (NYSE:FDO), leaving my semi-final list at 34 stocks, which are shown in the table below.

(NYSE:AGCO)AGCO CORP
(NASDAQ:ALTR)ALTERA CORP
(NASDAQ:ANSS)ANSYS INC
(NASDAQ:BBBY)BED BATH & BEYOND INC.
(NYSE:BBY)BEST BUY CO. INC.
(NYSE:CAG)CONAGRA FOODS INC.
(NASDAQ:CTXS)CITRIX SYSTEMS INC.
(NYSE:DCI)DONALDSON CO INC.
(NASDAQ:DISCA)DISCOVERY COMMUNICATIONS INC
(NASDAQ:DLTR)DOLLAR TREE INC
(NASDAQ:EXPD)EXPEDITORS INTERNATIONAL OF WASHINGTON INC.
(NASDAQ:FOSL)FOSSIL GROUP INC
(NYSE:GWW)GRAINGER (W W) INC.
(NYSE:KSU)KANSAS CITY SOUTHERN
(NYSE:LH)LABORATORY CORPORATION OF AMERICA HOLDINGS
(NASDAQ:LKQ)LKQ CORP
(NYSE:MOS)MOSAIC COMPANY (THE)
(NYSE:NUE)NUCOR CORP
(NASDAQ:PAYX)PAYCHEX INC.
(NYSE:PVH)PVH CORP
(NYSE:RKT)ROCK-TENN CO
(NYSE:RL)RALPH LAUREN CORP
(NASDAQ:ROST)ROSS STORES INC
(NYSE:RS)RELIANCE STEEL & ALUMINUM CO
(NYSE:SJM)J.M. SMUCKER CO (THE)
(NYSE:SNI)SCRIPPS NETWORKS INTERACTIVE INC
(NASDAQ:SRCL)STERICYCLE INC
(NYSE:SWK)STANLEY BLACK & DECKER INC
(NYSE:TDC)TERADATA CORP
(NASDAQ:ULTA)ULTA SALON COSMETICS & FRAGRANCE INC
(NASDAQ:VRSK)VERISK ANALYTICS INC
(NYSE:WHR)WHIRLPOOL CORP
(NASDAQ:XRAY)DENTSPLY INTERNATIONAL INC.
(NYSE:ZTS)ZOETIS INC

Step #3: Corporate Governance

For my final step, I looked at the corporate governance score for each of the 34 companies above using governance data from Institutional Shareholder Services. The score that each company is given ranges from 1 to 10, with 10 meaning the company has potentially many governance issues. In addition, the score is broken down into four subcategories: Board Structure, Compensation, Shareholder Rights and Audit. I focused on those companies that had an overall governance score of 9 or 10, and had a red flag under the shareholder rights section for takeover defenses.

My Final List

After looking at the governance data, I found only four companies had a governance score of 9 or 10, and had a red flag for takeover defenses, and they are listed in the table below along with the governance score for each.

DISCA

DISCOVERY COMMUNICATIONS INC

10

KSU

KANSAS CITY SOUTHERN

9

SJM

J.M. SMUCKER CO (THE)

9

SWK

STANLEY BLACK & DECKER INC

10

Performance

The chart below shows that each of these four companies has significantly underperformed the S&P 500 over the last year. Out of the four companies, Stanley Black & Decker was the only company to have a positive price performance this year, while the other three have not even posted a positive return over the last year.

(click to enlarge)

Closing thoughts

In closing, I believe these four companies are worth a deeper look as potential activist targets or takeover targets because each of my final four companies has poor governance as measured by ISS, weak takeover defenses, and they have underperformed the market. To me it would make sense for an activist investor to come in and mix things up because the stocks have underperformed so much.

Disclaimer

Source: Potential Targets For Activist Investors