Activist-Inspired Ideas

 | Dec 19, 2013 | 5:00 PM EST
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There's a saying that in any market, bull or bear, an astute stock-picker can do well. In any market there are presumably companies that remain unloved or undermanaged that create attractive investment opportunities. Some of the best opportunities are businesses where activist investors or large shareholders have come in and directly implemented positive changes.

A very interesting opportunity is found in Superior Industries (SUP), a $532 million maker and supplier of aluminum wheels to automakers. GAMCO Investors, a 13% shareholder, wants the board to adopt a proposal to authorize a tender offer to buy at least $40 million worth of shares. Superior has $186 million in cash and GAMCO notes that $76 million is available to distribute to shareholders without adding additional leverage to the balance sheet. If you do the math, the $76 million represents 15% of the company's current market cap.

Another interesting name is Bravo Brio Restaurant Group (BBRG) a casual dining chain consisting of 104 restaurants under three difference concepts. BBRG has a market cap of $313 million, no net debt and trades at 18x forward earnings. Discovery Equity Partners recently built a 5.2% stake but hasn't announced any plans or proposals. Looking at Bravo's cash flow statement, the company is generating more than $50 million in operating cash flow, less than 6x current enterprise value. Capital expenditure is currently around $35 million a year, suggesting an opportunity to generate significant free cash flow if capex is reduced.

Microsoft (MSFT) continues to be a very intriguing bet given its size and stability, and a 3.1% dividend is not bad considering Fed Chairman Ben Bernanke's statement Wednesday that low rates are here for a long time. The company is taking its time to find the right CEO, a prudent move in my view. Microsoft is a $45 to $50 stock based on its cash generation alone, especially if the company continues to ramp up its dividend and buyback.

Fannie Mae (FNMA) and Freddie Mac (FMCC) are two more names to keep an eye on. They are being pursued in the activist sense and two high-profile investors, Fairholme Capitol's Bruce Berkowitz and Pershing Square's Bill Ackman, should not be ignored. Both have very successful records in financial turnaround investments.

Activists are very granular stock-pickers who seek specific changes in a company to effect value. They operate irrespective of market valuation and instead take a bottoms-up approach at a company-specific level. Use activist ideas as a platform for investment opportunities in today's market.

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