Ride the Activists' Coattails

 | Feb 27, 2013 | 10:30 AM EST  | Comments
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Activist investors have been, well, active so far in 2013 and have already given us a few priceless moments. The Icahn-Ackman debate will go down as one of the best bits in the history of business television. David Einhorn has gone after Apple (AAPL) and he appears to be winning so far. Activists have been buying up underperforming and cash-laden companies to force an increase of shareholder value. I haven't checked in on activist activity in a while, and given recent events, today is the perfect time to see where we might ride activist coattails for profit.

Nearest and dearest to my heart is Tuesday's activist filing in CommonWealth REIT (CWH). I have long maintained that these shares have been severely undervalued, and two activists have decided that the stock is cheap and the company badly mismanaged. The real estate investment trust announced an offering of notes and equity Monday, and Tuesday morning Related Fund Management and Corvex Management pounced on the company's management while announcing an almost 10% stake. The activists have said that if the board attempts to go forward with its equity and debt offerings, they will remove the board and replace them with new trustees.

In their letter to management, the two firms said that the company's asset value was $40 a share and the value could be increased to $50 a share in just two years by following their proposals. They were also sharply critical of management's high fee collections while the market capitalization continues to drop. They are proposing a new management structure and approach to capital allocation that will cause the stock price to more closely reflect the underlying value of the property portfolio. The announcement caused Commonwealth shares to shoot up by more than 50% Tuesday, but if the activists are successful, the shares have the potential to double over the next two years. I would wait for a pullback, but these shares still trade at less than 60% of book value.

We are seeing activist activity in the small bank space, especially from PL Capital, which recently announced a 5.5% position in BankFinancial (BFIN) and disclosed activist intent. The Illinois-based bank has been trying to clean up its balance sheet via asset sales and loan restructurings. The firm sees the bank's shares as undervalued and said they will exercise shareholder rights to suggest a new course of action for the bank. In a recent article in Crain's Chicago Business, one of the firm's principles, John Palmer, was clear that he thinks the bank should be sold, telling the magazine, "We see it as a good strategic fit for someone down the road." The stock trades at 90% of tangible book value and is cheap enough to buy in a Trade of the Decade small-bank portfolio.

Ader Group has launched an activist assault and proxy contest against the management of casino supplier International Game Technology (IGT). The firm says that management has taken its eye off their core competency and wasted time and effort on non-core activities. At least one of the new potential board members has the recommendation of one the gambling world's true heavyweights, Steve Wynn. Ader further says that management once had deep ties and connection to the gaming business, but the current board has no real casino insiders in house. They believe IGT is losing market share and needs to return to their original key focus on gaming machines. They pointed out that the stock was more than 60% below the all-time highs and had outperformed key competitors WMS Industries (WMS) and Bally Technologies (BYI). It's going to be interesting to watch this play out, and Ader's "Rescue IGT" website is a lesson in the activist and proxy fight process.

Over the years, I have done very well by tracking activist investors. I have done even better when getting in ahead of the activists by buying stocks like CommonWealth and Tecumseh Products (TECUA) that eventually attract an activist that unlocks shareholder value. Tracking the "what" and "why" of leading activists can make us better investors and pad our P&Ls over time.

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