Even if you don’t have a million dollars to invest, you can still invest like an activist. Riding the coattails of activist investors is a great way to invest in companies with the potential to unlock value for shareholders.
Activism has been around for decades. But the idea of activist investing hasn’t always been as popular as it is today. It was once a rather taboo topic.
When Carl Icahn first started activist investing in the 80s he was called a “corporate raider.” Today, activist investing doesn’t get quite as bad a rap.
Rather, some activist investors are heralded as heroes, helping unlock shareholder value that retail investors can’t seem to get unlocked on their own.
There’s even a mutual fund, called the 13D Activist Fund, that focuses on stocks that have an activist investor pushing for change at the company.
What’s more, the likes of CNBC and Bloomberg do a great job of covering what billionaires Car Icahn or Bill Ackman. However, some of the most underrated opportunities offer the most upside.
These activist campaigns are less followed than high-profile activist battles like Icahn versus Apple (NASDAQ: AAPL), or Ackman versus Herbalife (NYSE: HLF).
Even still, although these companies are smaller, there’s still the issue of needing a few million dollars — or $28 billion in Carl Icahn’s case — to invest in order to get the company’s attention.
But you can still invest like an activist by following some of the best underrated players in the market. Here are the top 3 stocks for investing like an activist:
No. 1: PetSmart, Inc. (NASDAQ: PETM)
PetSmart is a retailer of pet products, operating some 1,300 retail stores. Jana Partners owns right under 10% of the pet supplier. Jana is quite the activist fund. It had a previous activist campaign at Outerwall (NASDAQ: OUTR) and is still an investor in Walgreen (NYSE: WAG).
Jana got involved with PetSmart a number of months ago, noting the company’s underperformance. Jana wants management to improve the returns to shareholders, including the potential outright sale of the company. Shares are still down 8% over the last twelve months.
Trading at a P/E (price-to-earnings) ratio of 17 puts PetSmart as one of the cheaper stocks in the specialty retail industry. It also has one of the more robust returns on invested capital — clocking in at 28% over the trailing twelve months.
No. 2: Wausau Paper Corp. (NYSE: WPP)
This paper company makes and sells towel and tissue paper products. The company has the activist fund Starboard Value owning 15% of the paper company. If you’ll remember, Starboard is also working on Darden Restaurant Inc. (NYSE: DRI), putting out a 300-page report chastising Olive Garden for not salting its pasta and offering too many breadsticks. The fund also recently announced a position in Yahoo (NASDAQ: YHOO).
Nonetheless, Starboard started pushing for a sale of Wausau a couple years ago. Since then it has pushed for management changes, cost cuts and for more cash to be returned to shareholders.
The company’s dividend yield is still only 1.5% and the company’s stock is down 19% over the last five years, while the S&P 500 is up 85%. However, things could be looking up for Starboard and Wausau investors.
The company has divested its specialty paper business in an effort to focus on its core business — making tissue products. This is a big positive as tissue products are less discretionary than printing and specialty products.
Wausau is expected to grow earnings over the next five years at the highest rate of any paper and packaging company; Wall Street expects Wausau to grow earnings at an annualized rate of nearly 42% over the next half decade. That’s quite impressive and could easily translate into a higher stock price.
No. 3: The Wendy’s Co (NASDAQ: WEN)
The notable activist and billionaire Nelson Peltz upped its stake by 40% in July. The renewed interest in Wendy’s by Peltz could come as the fast food industry appears to be heating up, with Burger King Worldwide Inc (NYSE: BKW) looking to purchase Tim Horton’s (NYSE: THI) at a near 30% premium.
Interestingly enough, Wendy’s spun-off Tim Horton’s (NYSE: THI) back in 2006. Then, in 2008, Nelson Peltz bought up shares of Wendy’s. Peltz’s Trian Partners still owns 18% of the fast food company.
Wendy’s is slowly transitioning to a franchise-based model, which allows the restaurant operator to expand faster with less capital — it now owns less than 15% of its stores. Ultimately, this move will also boost margins by lowering its general and administrative expenses.
The fast food chain remains a leader when it comes to menu innovation. But that’s not the only innovation; Wendy’s is looking to introduce mobile payments in 85% of its United States’ stores, eventually leading to mobile ordering. That’s something we have yet to see any of the major burger joints implement.
It’s doubtful many retail investors have the wherewithal to launch their own activist campaign, but they can ride the coattails of deep-pocketed activist investors. The three stocks above are interesting places to start looking when it comes to investing like an activist.
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