Like Christmas in July

 | Jun 27, 2013 | 2:00 PM EDT  | Comments
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In addition to running screens and reading 10-Qs and 10-Ks, one of my regular activities involves tracking the filings of activist investors. While many of the larger activists, like Carl Icahn, make headlines on a regular basis, a lot of smaller activists have had a great deal of success finding cheap stocks and forcing corporate change to unlock value. I use them as a source of ideas and I am always delighted when an activist takes a position in one of my stocks. It's often a catalyst for rapid improvement of the stock price. Such is the case now as activists have been stalking a few of the stocks I have written about and own.

The biggest story has been CommonWealth REIT (CWH). The Related Companies, a large real estate investment firm, and Corvex Management, an activist firm headed by a Carl Icahn protégé, have teamed up to force out the board and unlock the value of the shares. There is a lot of value here as book value is $26 per share and the appraisals of net asset value place the value of the company near $40 per share. It has been a nasty fight as the external management company controls the board and enjoys an enormous stream of fees from the relationship.

Corvex and Related made an offer for $27 per share that was rejected by management. CommonWealth then went forward with a 34.5-million-share offering at prices well below book value that the activists tried to stop. Shortly after that, Perry Corp., another activist hedge fund, announced that it owned more than 5% of the company and was supporting Corvex. Corvex/Related made another offer to acquire the company at $24.50 per share and that was also rejected.

In the latest round of the fight, the activists have said that the results of their consent solicitation show that they have 70% of shareholder votes in favor of removing the entire current board. CBRE Group (CBG), a large real estate management firm, has agreed to manage the properties in the interim until a new board is elected, and a co-founder of Archon Capital has agreed to serve as interim CEO until a new one is elected. CommonWealth has rejected the removal of the board and says the consent solicitation is not in line with the bylaws. This is heading to arbitration July 18 but odds favor the dissidents. Two leading corporate governance watchdogs, ISS and Glass Lewis, support the effort and suggest management be removed.

The best outcome for shareholders is a replacement of the board and existing management without a full takeover. A new board with an eye on maximizing return could easily realize $34 to $40 a share from the existing asset base. Cutting management fees could also lead to higher dividends for us. I am not going to complain if we get a full buyout around $30 per share as I own the stock around $19, all in costs after several purchases over the past few years, and I have gotten around half the money back in dividends over time.

Earlier this month activist Joseph Stilwell announced that he was looking to gain a board seat at Malvern Bancorp (MLVF) and push for dividends and share buybacks to increase the value of the stock. Stilwell has a long history with Malvern; he sued last year and only dropped the suit when Malvern announced a second step conversion in January. Sitwell and his funds own 9.9% of the outstanding shares. PL Capital, another well-known and successful bank-stock activist investor, also has an active stake of 9.8% of the bank. The stock is cheap, trading at 78% of book value, and flush with cash after the second step offering earlier this year. The stock should be owned by every investor hoping to take advantage of the trade of the decade. The presence of two strong activists could lead to positive results sooner than hoped.

Seeing an activist take a stake in one of my existing holdings is like getting a Christmas present in July. It might not have been expected, but it is not unwelcome either. Both of these stocks have enormous upside potential from current levels, and the odds of recognizing that value sooner rather than later are rising.

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