In addition to searching for cheap stocks in the dark corners of the market, I also like to keep an eye on the activist investor community. Activists can often help to identify potentially undervalued stocks, and they also are often the catalysts for unlocking that value in a stock.
The big activists are pretty easy to follow, as they tend to make a big splash when they mount an activist campaign in a particular company. In fact, it would be more difficult not to know what Carl Icahn or Bill Ackman is doing in the market because they announce their moves loudly and often in the financial press. Over the years, I have made more money with the smaller activists who mostly operate out of the spotlight. I try to keep track of who is buying what among smaller activist investors.
One of the more interesting campaigns of late involves Strategic Hotels and Resorts (BEE), which owns resorts and high-end urban hotels. Orange Capital is a New-York-based investing firm that engages in activist style investing in real estate investment trusts (REITs). In a recent presentation, Orange Capital said that it considers Strategic to be substantially over valued and that the value of the assets is close to $14, which is well above the current share price.
The company had announced that they would seek a buyer for the company but Orange still plans to nominate four directors to the board to further push for the sale of the company. Strategic just sold a property to Bill Gates' Cascade Investments and will use the proceeds to reduce its debt load.
I doubt that will be enough to satisfy the activists and there will be additional pressure to sell the rest of the properties -- or the company outright -- to unlock shareholder value. I am not sure I agree with their net asset value (NAV) calculation and have not bought the shares yet. However, I am interested to see if Orange can push a deal though in the hotel sector.
Patriot Financial Partners is a private equity firm specializing in community bank stocks. Given my great affection for this sector, I follow the firm pretty closely. The firm just announced a 7.7% active stake in Banc of California (BANC). The bank is the holding company for First PacTrust Bancorp located in Irvine, Calif. and has 19 branches in the state as well as 24 mortgage production office across the western portion of the U.S.
In the filing, Patriot management said that while they intended to exercise their rights as shareholders, they had no significant plans at this time to suggest any transactions that would substantially change of lead to a sale of the bank. The guys at Patriot have a good eye for value and with the shares trading right at book value, it is worth keeping an eye on the stock to see if a bargain opportunity presents itself at a lower price.
One of my favorite stocks is seeing an aggressive activist campaign from investor Peter Kellogg. The former head of Spear Leads now owns more than 30% of the outstanding shares and recently announced a plan to fix the number of directors at MFC to 12 and nominate eight directors. Through his insurance company IAT Reinsurance Company, Kellogg has been a longtime owner of the stock; he has lost confidence in the board of directors and feels immediate change is needed.
Proxy Advisor ISS has commented on the filing saying in a press release: "On the strategic side, the dissident's approach to discern the company's core and non-core assets based on risk/reward analysis may help better define the company's underlying main business strategy and also improve operational efficiency."
The shareholders meeting and vote is set to take place in Hong Kong on Dec. 27. The commodity supply chain company trades at less than 70% of book value and yields 3.25% right now. It's a great buy at this price.
It is hard to ignore the big activists but the smaller ones may provide more value for us as individual long-term investors. There is not a big immediate reaction to their filings as there usually is with an Icahn or an Ackman announcement. Often they find the smaller companies also fit the profile of deep-value, long-term opportunities and can help unlock the value in some of safe and cheap stocks.