Activist investing is one of those words that can now be applied liberally to any investor who runs a proxy contest or tries to effectuate change at a company. True activism, in my view, consists of truly identifying an under-appreciated catalyst that can be ignited with change.
More importantly, that catalyst should truly unlock value for all the company's stakeholders and also create a precedent that has a positive impact on corporate governance as whole.
High quality activist investors create sustainable enduring value, not simply a pop in the stock price. Years ago, Bill Ackman of Pershing Square got involved in McDonald's (MCD) and one of the outcomes was the spinning off Chipotle Mexican Grill (CMG). McDonald's also went on a near-decade run of strong performance. That's enduring value from activism.
Last year was a fertile year for activist investors. Following these investors can be a strong source of high quality investment ideas. While one year certainly doesn't confer status in activism, especially when the stock market was up 30%, these are names you want to keep an eye on when they release 13D filings with the Securities and Exchange Commission.
Carl Icahn is a top pick. Even as one of the best, Icahn doesn't need to be perfect. Case in point is Dell (DELL), a tough battle that Icahn ultimately lost to Michael Dell. But Icahn saw his investment in Netflix (NFLX) nearly quadruple in value.
ValueAct Capital is another top name to follow religiously. According to Activist Insight, an annual review of activism, ValueAct made 12 new investments in 2013 with an "annualized follower return" of 73%. Investors who bought in after ValueAct disclosed holding did extraordinarily well. While Microsoft (MSFT) was the headline investment, sizzling results from names like Allison Transmission Holdings (ALSN) and Gardner Denver were also part of the mix.
Daniel Loeb's Third Point Partners is a very vocal activist firm that also has had enduring success. Last year, strong returns from Yahoo! (YHOO) and Nokia (NOK) helped lead to a 73% annualized follower return while new bets on Sony (SNE) and Sotheby's are still in progress.
Other activist names to keep an eye out for include Starboard Value, Bulldog Investors, JANA Partners, and Elliot Management. While activists have to be ultimately judged by the returns they generate, the true value of high quality activism rests in exposing the flaws. Dell was the perfect example of this. The buyout was clearly done at an undervalued price, but there were enough investors who were sitting on a decent return, that it didn't matter. Icahn was right, but it was too late. However, he exposed a very important disconnect between management and shareholders.
Activism is about the value creation, which is measured by the stock price. But don't ignore the value that activists provide the market when they expose mistakes and deficiencies. There's long-term value in that, too.