An Active Strategy

 | Jan 28, 2014 | 4:30 PM EST
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I keep track of activist investors as a matter of course as they often identify undervalued stocks and are successful at unlocking value in the form of a higher stock price. If you get in early enough quite a bit of money can be made riding their coattails. It is harder to do with the big guns like Carl Icahn and Bill Ackman as even a whiff of their involvement can send shares leaping almost immediately. But there are smaller investors who are pushing for changes at companies worth notice.

I have held shares of Cliffs Natural Resources (CLF) for some time and seen the stock pull well off its highs. We had a big gain in the stock that has contracted to a much smaller one as fears of a weak economy, slower growth in China and excess iron ore have weighed on the share price. The stock is higher Tuesday afternoon as an activist investor has the stock squarely in its sights and is agitating for a major shakeup at the company.

Casablanca Capital was formed in 2010 by Donald Drapkin and Douglas Taylor and has had a decent start as an activist firm. This morning the firm announced that it had accumulated more than 5% of Cliffs and advocated radical changes to the company that would unlock shareholder value in a very big way.

In a letter filed with the Form 13D to the Securities and Exchange Commission, the hedge fund suggested that Cliffs double its dividend, spin off its foreign assets and convert the U.S. assets to a master limited partnership. Casablanca also wants Cliffs to significantly cut Selling, General and Administrative Expenses and exploration costs, as well as divest infrastructure and other non-core assets. They have met with Cliffs' management twice in the last six weeks and Cliffs has released a statement that they "look forward to continuing the dialog to better understand their assumptions, projections and overall views."

Casablanca estimates that these measures will unlock the full value of Cliffs' shares, which they estimate to be $53, more than double the current price even after this morning's news-related bounce. The stock trades at just 60% of book value, so anything that increase the market's valuation of the company could lead to huge price gains, even if they fall short of Casablanca's estimate.

Insiders own less than 1% of the shares and most of the other institutional investors are large mutual funds that may be inclined to go along with anything that increases the stock price, so if this gets nasty, the activists probably have an edge.

The activist situation at Commonwealth REIT (CWH) is coming closer to a resolution. Hedge fund Corvex Management and Related Cos., the large real estate concern, have been pushing for the removal of the entire board at Commonwealth, and after months of legal wrangling, they are closer to forcing a shareholder vote to elect a new board. The activists, who own 9.6% of the company, have cited Commonwealth's long-term record of "worst-in-class" corporate governance and accused it of wasting tens of millions of dollars of shareholder money.

Commonwealth had tried to offer the activists a board seat but it was turned down in favor of a consent solicitation to replace the board. An earlier effort, which Commonwealth successfully challenged in arbitration, received the support of 70% of shareholders. I see no reason why an action conducted with the guidance of an arbitrator should not receive the same if not more support, allowing the activist to take control of the REIT.

The shares trade around book value but are well short of the more than $40 value the activist investor has suggested the shares are worth with better management and operating policies.

I like following activist investors and I attempt to piggyback on their ideas. I like it even better when they take a position in stocks I already own, like Cliffs and Commonwealth, and take aggressive measures to drive the value of my shares higher.

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