Whenever asked what stock to buy, Warren Buffett has always advised purchasing shares of Berkshire Hathaway (NYSE: BRK-A), the investment holding company that he heads. Those who have bought shares of Berkshire Hathaway have done very well, especially over the long term. But that has not been the story with Icahn Enterprises LP (NYSE: IEP), the investment vehicle run by Carl Icahn, another billionaire investing legend.
Despite the bearish performance by Icahn Enterprises LP in a bull market, research has shown that investors do better by following activist investors.
This investing style is so profitable that an exchange-traded fund has been created to follow their actions, the Global X Guru Activist Index ETF (NYSE: ACTX). The Global X Guru Activist Index ETF tracks a select group of investors. The investments will be based on the 13D and 13F filings with the Securities and Exchange Commission (SEC). A 13D must be filed when more than 5% of a company is acquired. Institutional investment managers running more than $100 million in assets must file a 13F every quarter.
Research by FactSet reports that about 15% of the Standard & Poor’s 500 Index (NYSE: SPY) have faced an activist campaign.
According to The Economist, these companies have done better. There are many reasons for this, some positive, some negative. The bad is that many companies are poorly run. The best evidence for this is the high failure rate for mergers and acquisitions. Berkshire Hathaway does a great job acquiring other firms. So does Southwest Airlines (NYSE: LUV). Between 70-80% of mergers fail to produce to expected results, however.
Other bearish evidence is a poor balance sheet, inefficient deployment resources, and a company failing to perform as well as others in its sector.
But activist investing is not all just about haters, however. Apple (NASDAQ: AAPL) shareholders have done very well since Carl Icahn took a large position. Both the share price and the dividend have soared. Apple has become much more shareholder friendly thanks to activist investors. The same is true with Microsoft (NASDAQ: MSFT). Because of activist investors, Apple, Microsoft and others have committed to dividend frameworks that most likely would not have existed before.
So, what’s the best way to profit from the actions of activist investors?
The easiest way to is to buy shares of Berkshire Hathaway, Icahn Enterprises LP, other stocks such as Greenlight Capital (NASDAQ: GLRE), run by hedge fund guru David Einhorn. That is what Buffett recommends, and those who have bought shares of Berkshire Hathaway have done very well over the long term. For 2015, not so much. Since the first of the year, Berkshire Hathaway is down nearly 6%, Greenlight Capital is off by 6.40%, and Icahn Enterprises LP has plunged by about 3.4%.
Or investors can try to invest in industries or stocks that seem to be targets.
There has certainly been no shortage of writing about how Buffett invests. Icahn is an inveterate tweeter. Einhorn even wrote a book about why he was shorting Allied Capital, which proved to be a profitable.
But it would be costly for an individual investor to try to buy shares of what Buffett, Icahn, Einhorn, and others might go after next.
The new ETF, Global X Guru Activist Index ETF, certainly bears watching. One of the advantages of owning an ETF is that it allows for individuals to have broad exposure to an asset class. It could be the way to profit from buying alongside the best in the business.
Jonathan Yates does not have a position in any of the securities mentioned in this article.
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