Activist investors are unique in that when they make an investment, it is made irrespective of what's going on in the marketplace. They find a target company and after digging deeper they see value-creating catalysts that can be achieved through their efforts. Activists view the market as merely a conduit with which to buy and sell. They often create the value.
For investors willing to exercise the patience needed for an activist campaign to play out, investing in activist targets can be a productive tool in volatile market environments such as today. Even if an activist doesn't fully succeed, often just the mere presence of an activist investor exposes a mispriced asset the market then begins to re-examine.
One of the biggest activist targets today is Chesapeake Energy (CHK), which is getting a one-two punch from Carl Icahn and investment firm Southeastern Asset Management. Recently, CHK agreed to replace four directors with others chosen by Icahn and Southeastern. After falling to a low of $13, shares are now trading at $18, but still down from $35. Most of Icahn's shares were bought around $15 to $16, but Southeastern was buying in the $20s when it felt Chesapeake was a bargain. Investors will get a decent 2% yield while they wait.
Another widely-successful activist, Bill Ackman of Pershing Square, has a plan under way at retailer J.C. Penney (JCP). Ackman has had mixed results with retailers, but overall his efforts have made his investors a lot of money over the years. At Target (TGT), where Ackman failed to win a proxy, he was still able to influence management into making some key, value-creating moves. At General Growth Properties, a bankrupt mall retailer, Ackman hit a grand slam making the most successful investment in his career by pulling nearly 20 times his initial investment. JCP shares fell hard after a bad quarter and now sit at $24, near a 52-week low and at similar prices to what Ackman paid. Ackman recruited Ron Johnson, the retailing genius behind Apple to lead the way.
Hartford Financial Services (HIG) is being pursued by John Paulson. The stock has recently sold off and now trades at $17. Paulson is pushing hard for a spinoff of the Company's property and casualty insurance business. In a February 2012 letter to the board, when the stock was trading higher than today, Paulson explained why such a spinoff could increase the value of the stock by up to 60%. Paulson also sites a valuation done by Goldman Sachs that illustrated that value could be enhanced by 70% via a spinoff. Hartford's CEO was recently on TV expressing his dissatisfaction with the stock price, not surprising for a CEO. But the fact the Paulson is in the picture puts pressure on management to act.
In all of the above scenarios, the performance of the stock has more to do with the efforts of the activists than the mood swings of Mr. Market. And while activists can be very patient investors, they are more eager than anyone to unlock the value sooner rather than later.