Is Bigger Better?

 | Oct 09, 2012 | 3:00 PM EDT
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While suffering through a relatively quiet market day Monday, I decided to test an idea. I wrote in Columnist Conversation about what happens when large beneficial owners of a company increase their stake. I found that 75% of the time, the stocks rose by an average of 37% between the purchase date and last Friday's close. The losers averaged a loss of 17% for a net gain of more than 23% per target company. This test needs more work, but the initial results are interesting.

The list of companies meeting the conditions interests me. Some are being accumulated by activist funds or potential strategic partners and they could see deals or a restructure in the future. It's an interesting list of potential trading or investing ideas that could outperform, regardless of market direction.

One such company is Wausau Paper (WPP). Activist investor Starboard Value has been a consistent buyer of the paper and packaging company's stock. In the past few months, the fund has increased its stake to more than 6 million shares, or just over 13% of the company. Starboard wants Wausau to break itself up and sell off the pieces, or just sell the whole company outright. Wausau has made changes in the past year by selling some business lines and selling off its timber holdings. In February, it struck a deal allowing Starboard to nominate two directors to the board.

The company has two main businesses: The tissue segment, which makes products for washrooms in what they call the "away from home" markets, and the technical division, which makes paper products for the food, coated and liner, and industrial markets. Management says it has a solid strategy for growth and increasing shareholder value. It expects to grow the tissue segment of the business over the next few years and improve the margins of that business. The company currently has about 8% of the market for public washroom towels, tissues and soap dispensers and believes it can increase that share by expanding premium and green offerings. If it hits these growth targets, this stock could easily double over the next few years. But if Starboard Value gets its way, the stock could double much faster through asset sales or an outright sale of the whole company.

The once high-flying mutual fund company Janus Capital Group (JNS) struck a deal in August with Japanese financial services firm Dai-Ichi Life Insurance to help reverse their post-boom troubles. The Japanese firm is investing $2 billion in Janus and it will distribute Janus products in Japan. Dai-Ichi said it would buy as much as 20% of Janus and take a seat on the board. It has been a steady buyer of JNS shares and now owns about 14% of the company. Janus has lost share to fixed-income-oriented rivals in the fund business over the past few years, but the balance sheet is strong enough to weather the storm and eventually recover some of its glory. An outright sale would not be a shock as Janus would be a good fit for several large asset-management firms.

Noted hedge fund manager Larry Robbins of Glenview Capital has increased his ownership of Tenet Healthcare (THC) to more than 10% of the hospital company. Tenet has been in the midst of a turnaround for many years but has never gotten on track. Its latest moves include a reverse stock split, buybacks and debt-funded acquisitions. The company has done a decent job in recent months of refinancing high-cost debt and extending debt maturities to give its plans time to work. The company's moves to improve shareholder value have fallen flat. But at least one successful investor thinks this time might be the charm: I have owned a small position in the stock for several years, so I hope Robbins' bullish bet is correct.

When a big investor increases its stake in a large holding, I consider it an expression of very high conviction. Tracking these types of moves can give traders and investors a list of target stocks with a potential near-term catalyst for higher prices.

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