This commentary originally appeared on Real Money Pro at 10:44 on Nov.23. Click here to learn about this dynamic market information service for active traders.
Activism isn't heroism. When you've been wallowing in a loser stock or a value trap for weeks or months or even years, often you'll welcome an activist. In some cases, it may be the kick in the pants the Board of Directors or executive level management need to get a stock moving in the right direction. But it is important to remember involvement from a large shareholder doesn't always equate to bullishness.
Take a look at Chesapeake Energy (CHK) and Freeport-McMoRan (FCX) and you'll get a great visual example of this idea. Now, I only picked these two names because they are great examples of stocks that have painted the headlines due to activism recently.
I'm not picking on one activist in general, even though one might come to mind. I won't even say his name, because: a) it doesn't matter and b) he's extremely successful and one or two failures would not define him nor change him.
In reality, it is the same for many activists. The track record of the activist does matter as some have met with more success than others, so I wouldn't just dismiss the name for no reason if I were looking for one to buy in particular, but that's not the point of the discussion here. I'm talking about the general notion that activists are always worth chasing.
The market sees a press release and jumps on board. Sometimes, this creates a nice squeeze in a stock. That certainly was the case with FCX. We moved quickly from the single digits back into the double digits and then into the teens.
Ironically, the stock moved very big before the announcement even hit the press, but for the sake of saving a dead horse, I won't discuss the idea maybe some folks already knew about the forthcoming announcement.
But I digress. The stock was strong, and there were some great short-term gains to be realized; however, FCX bulls now find themselves back at low.
Chesapeake, another name with involvement, finds itself at significant lows here, with the possibility some bondholders might be throwing in the towel on the company. Sure, both names occupy the commodity space, but they also occupy that activism space.
Both charts are living a bull's worst nightmare of traveling from upper right to the very lower left, and short of a buyout, both look dead even in light of activist involvement. The issue here now is even a big bounce barely gets the stock above 52-week lows.
CHK can bounce 50% and only find itself trading back to where we began November. FCX can almost double and bulls will find themselves with the chance to sell at similar prices of the initial activism hype and excitement.
I'm certain activists put hundreds of hours of fundamental and structural research into a company before making a purchase, so would it hurt an investor to put eight or 10 hours, at the very least, into the same before jumping on the coattails?
The point is where it is an activist or a 13-D filing or even Buffett adding to a name, put some of your own time in if your strategy is to follow along with this crowd. They aren't chart buyers or trend followers, and their time horizon often exceeds that at what many have evolved to in this age of instant access to information.
The holidays are a great time to carve out some down time to start digging, if this area interests you. And while you're digging, maybe taking a little time to dig two plots for both these names. It feels like at least one will need to use it.