Being an activist investor is a hard way to make a living. The typical practitioner first spots a company that is performing badly because of management mistakes. Then the activist buys a big stake in the stock and begins pushing for changes. Activists may advocate raising the dividend or replacing the CEO.
When an activist succeeds, the profits can be huge. Among those who have made fortunes by shaking up corporate boards are Carl Icahn, Nelson Peltz and Bill Ackman.
Should you invest in stocks that are targeted by activists? Not necessarily, says Ken Squire, portfolio manager of 13D Activist
To separate the stars from the also-rans, Squire tracks all of the approximately 1,500 13D documents that are filed at the Securities and Exchange Commission each year. Investors must make a filing when they have acquired more than 5% of a company's shares. Squire monitors each deal, assessing the obstacles that activists face. He analyzes investment track records, determining whether an activist excels in particular industries or types of deal. Squire sells the data to activists and institutional investors.
In December 2011, he opened the activist mutual fund, which invests in 20 or so stocks that have been involved in 13D filings. The fund aims to outperform the S&P 500 (INDEXSP:.INX). Just as important, Squire seeks to provide diversification because activists can push up stock prices during weak markets. So far the approach has been succeeding. In 2012, the fund returned 21%, outpacing the S&P 500 by 5 percentage points. During the fourth quarter of the last year, the portfolio returned 5.2%, while the S&P 500 sank slightly into the red.
One of Squire's favorite holdings is Agrium
Squire says that JANA Partners has a track record for outperforming the S&P 500 by a wide margin. He says that the activist has a good chance of success with Agrium because there are a variety of factors that could push up the stock price. "Even if they fail to split up the company, the stock could rise if there are better cost controls or better capital allocation," he says.
Stocks often bounce after a 13D filing is announced. But Squire says that it is not too late to invest after the initial jump. He says that the average holding period for an activist is 15 months. Often the deals take longer to complete, and some of the biggest gains occur late in the game.
Squire owns Howard Hughes (NYSE:HHC)
As chairman of Howard Hughes, Ackman has faced a series of problems. Some of the real estate projects stumbled during the financial crisis, and development efforts were forced to halt. Now Ackman is obtaining financing and pushing forward with projects. "This is a situation where the activism has paid off, and they are running the company more efficiently," says Squire.
Squire also holds DineEquity
At the time of publication, Luxenberg had no positions in securities mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.