5 Large Caps In Activist Cross-Hairs

Includes: ADBE, BMC, CXW, HIG, IR
by: Oozing Alpha

It pays to follow activist targets because, by paying attention to this area, you are likely to come across value stocks wrapped in a catalyst. A few things to consider in activist investing:

  • Not to jump in right away when a well-known activist investor discloses a large position in a stock along with a list of demands. Typically these filings are immediately followed by a spike in the stock price, most likely due to short-covering or from excited short-term traders stampeding into the name. More often than not, these stocks subsequently decline in price when the initial buzz subsides and investors take easy profits.
  • There is plenty of time to do one's homework to figure out whether the activist's demands make sense.
  • Look at the activist's past track record. For example, and I will not name names, one very well-known octogenarian activist has a habit of making bids to buy entire companies and then pulling his offer, burning piggy-backed investors along the way.
  • Perform detail fundamental analysis on the company in question. You may find that the business is hopelessly broken or belongs in a really bad industry and the activist is simply a long-term investor who is doubling down on his or her grave error in judgment.

In any event, following activist filings is a great source of finding good ideas but in my opinion, it is important to think of it as a screening tool and not an investment philosophy or style.

Here are five large-cap companies with recent activist filings:

Company Ticker Symbol Price Market Cap
Hartford Financial Services HIG $17.02 $7.5 Billion

On February 14, 2012, John Paulson filed a 13D and attached a detailed letter addressed to the Board of Hartford. In his letter Paulson described in great detail how a tax free spinoff of the Company's P&C (Property & Casualty) insurance unit would benefit shareholders. Paulson estimated that if the unit were spun off, Hartford's stock could appreciate 60% to $32. Since that filing, the stock is actually down 13%. In March, Hartford announced that it is exiting its annuity business and will focus on its P&C business.

Company Ticker Symbol Price Market Cap
Ingersoll-Rand Plc IR $40.19 $12.0 Billion

On May 9, 2012, Nelson Peltz of Trian Partners disclosed a 7% position in Ingersoll-Rand. In this filing, Peltz complained that the Company's businesses have lagged peers in profitability. He stated that "there is an opportunity to enhance shareholder value by improving certain key financial, operational, compensation and corporate governance metrics and by considering various strategic alternatives, including a restructuring of its key business segments". Since the filing, the stock is down 9% and it now seems that this situation might become more adversarial than Trian may have initially anticipated.

Company Ticker Symbol Price Market Cap
BMC Software BMC $42.90 $6.9 Billion

On May 18, 2012, Elliott Management disclosed a 5.5% position in BMC Software in an SEC filing with a letter attached. In the letter, Jesse Cohn (Portfolio Manager) accused the Board of "entrenchment rather than exploring opportunities". The letter then gets into the reasons for stock underperformance and concludes that the best alternative to unlock shareholder value is to sell the Company. The stock is up a mere 3% since Elliott Management's filing.

Company Ticker Symbol Price Market Cap
Adobe Systems ADBE $31.57 $15.6 Billion

On April 12, 2012, ValueAct Capital upped its position in Adobe Systems to 6% from 5.1% with very boiler-plate language in the SEC filing. At the time of the filing, Adobe was defending itself against ISS recommendation to shareholders to vote against Say on Pay (an embarrassing situation, no matter how you slice it..). On the same day as ValueAct's filing, Adobe announced a $2 billion share buyback program and then subsequently expanded its Board to add three new members. Since April 12, the stock is down 6%.

Company Ticker Symbol Price Market Cap
Corrections Corporation of America CXW $26.58 $2.7 Billion

On April 5, 2012, Marcato Capital and Corvex Management, in a joint filing, proposed that Corrections Corporation of America convert to a REIT (Real Estate Investment Trust) or pursue other strategic alternatives. They further stated that they "believe that a REIT conversion would result in a significantly lower cost of equity capital, increased growth prospects and a material increase in value for all the Issuer's shareholders based on current trading multiples of comparable publicly traded REITs." Since this filing, CXW stock is down 8%.

I selected these five companies from the dozens of situations on my radar because these stocks have not appreciated much since the respective activist filings. In fact, most have declined. Closer inspection may very well lead you to conclude that there is a lot of locked-up value in these names. Happy Hunting!

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in HIG, IR, BMC, ADBE, CXW over the next 72 hours.

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