Tracking the Small-Time Activists

 | Apr 11, 2014 | 4:00 PM EDT  | Comments
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The bigger activists are very widely followed and just a hint that they are getting ready to move on a stock can quickly send its shares soaring. If Bill Ackman or Carl Icahn were ever overheard complaining about a meal at Ruth's Hospitality (RUTH) one evening, the stock would probably tack on 20% the next day, as investors anticipated a proxy fight.

It can be tough to make money following those guys, but everyone follows their every move so closely. However, if you track the Securities and Exchange Commission (SEC) filings carefully, you can find some other interesting activist situations by lesser-known investors that have the potential for solid returns.

One such situation is developing at GrafTech International (GTI). The company makes and sells graphite and carbon material science-based solutions that are used to make blast furnaces, fuel cell components and industrial lubricants. Former director Nathan Milikowsky was left off the board after GrafTech accused him of leaking material nonpublic information. He has not taken kindly to this action and formed an investment group that now owns 11% of the company. The group has also snapped up $127 million of debt issued by the company. The board has made some settlement offers, but the investor group so far has shunned them all.

The activist group has nominated five directors to the board to replace the current members. They point out that the company has underperformed and say they believe management has "failed to grasp the essential commodity nature of the high quality graphite electrode market and have gone to market with a disastrous price leadership strategy." They want to cut SG&A expense by 20% and reduce current inventories by more than $190 million to slim the company down and make themselves competitive in the current marketplace. They have said in presentations that if their measures are implemented that GrafTech shares could rise by as much as $7 a share. That would be a pretty fair return from the current price of $10.70 or so.

One of the more interesting battles is between outside investor Gregory Mark Shepard and Donegal Group, a property and casualty insurance company. The insurance executive owns more than 17% of the class AQ shares and 7% of the class B shares. Last year, he issued a scathing letter after management refused his offer to buy the company outright. He accused the board of using the company to enrich themselves at the expense of shareholderw. In his press release, he said, "By my calculations, during the 5 years between 2007 and 2012, Donegal Group's book value grew by a total of 13.4% or a meager 2.7% per year; book value per outstanding shares grew by a total of only 12.2% or 2.4% per year but stock options grew by an astounding 181% or 36.2% per year and fully diluted book value grew by a total of only 7.9% or 1.6% per year. "

Mark Shepard released a statement this week saying that he would pay a bonus to any hedge fund, insurance company or non-related third party that would buy the company. He seems to think this company would be better off being run by anyone but the current board. When making his bonus offer he said, "My intent now is to offer a closing bonus to any third party that can close on the acquisition of Donegal Group. In my opinion, Donegal Group's Board of Directors has failed miserably to meet its fiduciary duties and is one of the worst boards in corporate America. I intend to hold them to account." With the stock trading right at book value, any outside offer would offer attractive upside to current investors.

When the large activist investors make a purchase or sale, the market tends to move right away as traders rush to piggyback the trade. If you aren't able to jump in as soon as the filing is made and the media begins to trumpet the move, it is already too late. That is not the case with the smaller activists who don't have an in-house PR department or a direct line to the major financial news networks. Tracking the 13D filings on a regular basis only takes a few minutes a day and can help you find some very attractive special situations and potential takeovers.

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