This year activist investors have been busier than ever, but they’re just getting started.
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That’s because conditions in the market right now couldn’t be any more ideal for activist investing, and the hedge fund managers who do this sort of thing are not known for letting opportunities go to waste.
While Icahn’s activist investing resume dates back to the late 1980s, his latest targets have been Netflix Inc. (Nasdaq: NFLX), which delivered an $800 million profit for him last month, and Apple Inc. (Nasdaq: AAPL), which he is currently pressuring to borrow $150 billion for a massive stock buyback.
“In my opinion there has never been a better time than today for activist investing,” Icahn wrote. “While I am very proud of IEP’s record over the past decade, I believe this record will pale in comparison to what is yet to come.”
Activist Investing: So Hot Right Now
Carl Icahn has two main reasons for being so excited about the prospects for activist investing now: low interest rates and a growing awareness among institutional investors of the “prevalence of mediocre top management and non-caring boards at many of America’s companies.”
And that’s not even an exhaustive list. Right now there just aren’t that many natural catalysts left to drive stock prices higher.
“First of all, we have a slow growing economy. It’s hard for a lot of companies to get revenues up. They can’t get new business. They’ve de-levered, so it’s hard to get margins up. So what’s the last thing you can do? It’s take on debt and give something back to shareholders that way,” Yahoo! Finance columnist Rick Newman observed recently.
As activist investors target more and more companies, retail investors need to keep them on the radar screen because they almost always have a significant impact on stock prices.
And even when interest rates eventually rise and conditions are less ideal, activist investing will only slow somewhat.
Money Morning Capital Wave Strategist Shah Gilani said activist investing has proven itself such an effective tool for moving stocks that we’re guaranteed to keep seeing more of it.
“You’re going to see more of it because the power of the players is increasing,” Gilani said.
That power comes from the rapid increase in the assets of hedge fund managers like Carl Icahn over the past decade.
According to The Wall Street Journal, activist hedge funds had less than $12 billion under management 10 years ago, but now have more than five times that amount – $65.5 billion.
They also have more allies than they used to. When an activist investor targets a company now, it’s far more likely that other hedge fund managers, and even some large institutional investors, will join the campaign because they realize it’s in their interest.
“A lot of people benefit from their activism,” Gilani said.
Gilani said another long-term trend that has made activist investing more common is the growing cash piles on many corporate balance sheets.
Hedge fund managers don’t like to see capital sitting idle, he said. “They’re thinking, “It’s my job to increase P&L, and that capital is not working for me.”
To Profit, Think Like Carl Icahn
Retail investors can benefit from activist investors if they can spot a target early.
While it’s often too late to jump in after a hedge fund manager has announced his intentions, retail investors can try to anticipate which companies are likely targets by using the same criteria they do, Gilani said.
Clearly, size is not an issue. What activist investors look for are companies that are undervalued with strong balance sheets – low on debt and loaded with cash. A stagnant stock price also attracts their attention, particularly if it appears that management has been unable or unwilling to do anything about it.
Gilani also advised retail investors to pay attention to which stocks activist hedge funds are building large positions using such tools as Barron’s.
With that in mind, here is a list of potential activist investor targets:
- Intel Corp. (NYSE: INTC)
- Cisco Systems Inc. (NYSE: CSCO)
- Johnson & Johnson (NYSE: JNJ)
- Freeport-McMoRan Copper & Gold Inc. (NYSE: FCP)
- Pfizer Inc. (NYSE: PFE)
- Merck & Co. Inc. (NYSE: MRK)
- Devon Energy Corp. (NYSE: DVN)
- Apache Corp. (NYSE: APA)
- WPX Energy Inc. (NYSE: WPX)
- Janus Capital Group Inc. (NYSE: JNS)
- American Eagle Outfitters (NYSE: AEG)
- Corning Inc. (NYSE: GLW)
When not trying to ferret out where an activist investor will strike next, you can look into putting some money into one of the biggest areas of growth we’ve ever seen. Some of these stocks have already racked up gains of almost 300% — and they will go even higher as almost every object we own joins the wireless network. Say hello to the Internet of Everything.
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