3 Stocks Where Activist Investors Could Create Big Gains

by: Hawkinvest

Investing these days is tough, the market is full of risks and it's easy to lose money even if you buy an undervalued stock that has been thoroughly researched. For major sums of money, I think it makes sense to invest in mutual funds or exchange traded funds that can offer diversification. However, investing in individual stocks is a lot more fun and exciting, and for a portion of almost any portfolio, it also makes sense. A fund or ETF is probably not going to double in less than a year or even a couple of years, but an individual stock could, and most active investors need the thrill of stock picking.

However, since buying a stock means taking on company-specific and even industry risks, it makes sense to have some type of strategic edge when investing. There are many types of ways to have a strategic edge. You might have insight into trends in an industry or a new technology, or you might be a consumer who just had the best experience at a new restaurant chain or store that is public. Another strategic edge could be investing alongside an activist investor that is seeking the sale, break-up or restructuring of a company.

Activist investors often force change on a company and management that is far too comfortable with the status quo, and investing alongside them can often lead to major rewards. There are numerous investors who regularly follow and invest with well-known activists like Dan Loeb, Carl Icahn, Bill Ackman, and many others. While this strategy does not work every time, it can increase the odds of reaping the rewards of whatever change and shareholder value an activist investor can bring to a company.

Furthermore, when the market knows an activist is involved, especially a high-profile one, it can help put a floor under the stock price and this can help minimize the risk of losses. Avoiding or minimizing losses is another reason why investing with activists can give you a strategic edge. With that in mind, here is a closer look at some stocks that have been targeted by activist investors:

Yahoo!, Inc. (YHOO) has been targeted for change and the creation of shareholder value by Dan Loeb, the CEO of Third Point. Dan Loeb is well-known as an activist and he recently pushed for a new CEO and for new board members at Yahoo. He recently succeeded after he helped bring a resume issue to light with now-former Yahoo CEO, Scott Thompson. Also, three of Loeb's nominees were just appointed to Yahoo's board.

Mr. Loeb's Third Point is said to hold about 73 million shares of Yahoo now, and that means there is plenty of motivation for him to continue to find ways of creating shareholder value. With a new set of board members and the new CEO, Marissa Mayer, Yahoo might be finally positioned to perform and grow. Marissa Mayer was a key employee at Google, Inc. (NASDAQ:GOOG), and investors now hope that she can bring innovation to Yahoo and help monetize the significant Internet assets it owns.

Here are some key points for YHOO:

  • Current share price: $15.97
  • The 52 week range is $11.09 to $16.79
  • Earnings estimates for 2012: $1.03 per share
  • Earnings estimates for 2013: $1.17 per share
  • Annual dividend: none

Genworth Financial, Inc. (NYSE:GNW) has been giving shareholders a rollercoaster ride in the past few weeks. The stock jumped in value after it was announced that Highlands Capital Management had taken a 5.2% stake in the company. Highlands filed with the SEC that it sought activist discussions with management that could lead to an asset sale or spinoff of certain divisions that Genworth owns.

However, these hopes were somewhat dashed several days later when the company stated a spin-off of the mortgage insurance division might not be as easy as it appears. This seemed to cause selling that was only exaggerated by erroneous trades that occurred in a number of stocks, including Genworth, due to a technical issue at Knight Capital (NYSE:KCG). Genworth shares were probably also impacted by the news that MGIC Investment (NYSE:MTG) had announced a major loss for the recent quarter, which caused the company to breach capital limits that are required by regulators.

This means that MGIC Investment could have trouble with acquiring new business and the viability of that company is now in question. However, this could actually be good news for Genworth as it remains well capitalized and highly rated, which could mean it will see more business as weaker rivals go by the wayside. Genworth has other significant lines of business, including long-term care and annuities that continue to generate profits and its mortgage insurance business has been improving and is probably the strongest in the industry. Highlands Capital appears to see major value in Genworth shares for it to have taken a stake of over 5%. That value is likely to be recognized as Genworth remains diversified, solidly profitable and it will probably be eventually seen as the "best in breed" for this sector.

Key Data Points For GNW From Yahoo Finance:

  • Current price: $4.32
  • 52-Week Range: $4.06 to $9.68
  • Dividend: none
  • 2012 Earnings Estimate: 72 cents per share
  • 2013 Earnings Estimate: $1.35 per share
  • P/E Ratio: about 6 times earnings

J. C. Penney Company, Inc. has sparked the interest of a number of hedge funds, including activist Bill Ackman through his Pershing Square Capital Management who was said to take a 16.5% stake in J.C. Penney. Mr. Ackman seems very confident about his investment in this company even though the shares have been weak recently. He recently stated that he expects this stock to be worth 15 to 20 more than it is now, in the next 5 to 6 years. Part of this confidence could be due to the fact that J.C. Penney has a well-known CEO, named Ron Johnson.

Before taking the CEO position, Mr. Johnson was credited with creating the successful retail store strategy at Apple (NASDAQ:AAPL). Since Apple products are in high demand, it probably was not as challenging to create a winning retail store plan, so it remains to be seen if he can create this success at a department store. He has implemented a new pricing structure and more changes are expected in the future. A recent Forbes article has more details on the strategy for a "JCP" turnaround. With the shares trading at about half of the 52-week high, it might make sense to buy some shares and invest along Bill Ackman.

Key Data Points For JCP From Yahoo Finance:

  • Current price: $20.90
  • 52-Week Range: $19.06 to $43.18
  • Dividend: 80 cents which yields 3.8%
  • 2012 Earnings Estimate: 99 cents per share
  • 2013 Earnings Estimate: $2.16 per share
  • P/E Ratio: about 6 times earnings

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 GNW.

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