Track Small Activists for Big Rewards

Even boutique firms are sometimes successful in sparking change.

Activist investment funds have been having a field day so far this year securing seats in the corporate boardroom at targeted companies -- but it's not just the household names like Carl Icahn or Pershing Square's Bill Ackman that have found success. Even the smaller shops like Barington Capital have played a role in seating representatives to the boards of large-cap companies, which means the smart money should follow these firms's moves.

Activist funds are investment firms that purchase equity stakes in what they see as underperforming companies in order to force new, shareholder-friendly strategies on boardrooms. Icahn, Ackman and some other "celebrity" activists run funds with $1 billion or more in assets under management, but smaller shops with less money nonetheless sometimes make a big splash -- and can serve as an idea source for smart investors.

For instance, Barington Capital launched several successful campaigns this year, including one at Avon Products ( AVP) , a member of Real Money's Stressed Out watch list. Shares of the cosmetics giant have climbed nearly 50% since Avon announced in late March that it would allow Barington and fellow investment fund Cerberus Capital to elect an independent director to the board in order to dodge a proxy fight.

All told, Barington has won three of the 107 board seats claimed by activist funds so far this year despite having under $1 billion assets under management, according to a recent report by Lazard Research. "In spite of a reduction in companies targeted, activists are winning board seats at an unprecedented pace and predominantly through settlements, suggesting that board representation is the preferred channel for an activist to effect change," the study's authors wrote.

Smart investors can stay ahead of the curve on small shops by checking out 13-D filings that all financial firms must file with the U.S. Securities and Exchange Commission whenever companies buy a 5% stake in any public company. Available for free through the SEC's Edgar search database, 13D forms tell you where the activists have recently taken positions, meaning they see unseen values that other investors can piggyback on.

Julian Singer of JDS1 LLC, a smaller activist firm, said the benefit of monitoring small shops' 13Ds is that their investment maneuvers don't always immediately move markets the way that celebrity activists' filings often do. "One advantage is that if I come out and say I filed a 13D and say I plan to seek board representation, the stock's not going not going to instantly," Singer said in a recent interview.

According to 13D Monitor, a subscription investment website which tracks such filings, active filers among small firms include Barington, Blue Harbour, Corvex Management, Highland Capital, and Red Mountain Capital. Some small firms have found that the key to success has been to demand management changes under the threat of potential proxy fights with shareholders. In fact only seven of the 107 board seats won by activists so far this year have come as the result of a proxy contest, according to Lazard's study.

Singer was recently successful in pushing an activist investment strategy on the management team of Concurrent Computer ( CCUR) , which first involved a 13-D filing last year, followed by an open letter to shareholders this March. Ultimately, Singer was able to see the appointment of a JDS1-recommended director to Concurrent's board this summer. Shares of Concurrent, of which Singer held more than 9% in March, have since climbed about 14% since his firm began accumulating a position of roughly 5% last November.

 

"We just took a stake at the end of 2015 and got in touch with management," Singer said. "We saw an opportunity that we thought the market was missing."

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Please note that due to factors including low market capitalization and/or insufficient public float, we consider CCUR to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.