Hostile Takeover Returns For Individual Investors
“We’ve reached a temporary truce right now…” my good friend Eddie told me over breakfast at Chick-Fil-A.
“But there are some big changes coming down the line… In fact, I very well may not have a job a month from now.”
Eddie and I grew up together. We were college roommates, and we still keep in touch. And this weekend as we caught up over chicken biscuits, Eddie gave me a first-hand account of a dramatic transaction that is shaking up his career.
While this transaction may be giving Eddie sleepless nights, it’s part of a market trend that could make you a lot of money…
Eddie is the accounting controller for a large publicly-traded medical technology company. I won’t tell you which company because some of what Eddie shared with me may be confidential.
About a year ago, an influential investor bought a large stake in Eddie’s company. And since then, that investor has been actively pushing for changes in the company. Changes that should help the company become more profitable, and should drive the share price higher.
So far, the investor has been successful as the stock is up more than 50% this year alone.
“Honestly, I agree with most of his proposals” Eddie admitted.
“The two different business lines that we manage are hardly connected. And if we split the company into two different entities, investors could buy whichever stock they had the most confidence in. Eventually, both stocks should rise and that would be good for everyone!”
That’s exactly the type of change that this new investor is pushing for. And reading between the lines, that’s exactly what’s going to happen in the second half of 2017.
It’s the type of transaction that could make investors a lot of money.
And fortunately for us, there are many opportunities just like this popping up in the market right now.
Activist Investors Force Bigger Returns
Most investors look for companies that are profitable, well run, and growing profits. The investors then buy shares, expecting to earn a return as the company continues to grow. This traditional strategy has worked for smart individual investors as well as professional money managers.
But there’s a special breed of investors who take an entirely different approach.
This type of investor looks for companies where things are NOT going according to plan. Maybe there are problems with the company’s growth strategy, challenges in the industry, or management issues.
Activist investors love to identify these situations, and then jump headlong into the fray.
The idea is to buy a large number of shares of a challenged company. And then use those shares as leverage to convince the company’s board or management team to make big changes.
Sometimes these changes involve leadership shake-ups. Like the replacement of a CEO or the appointment of board members.
Sometimes these changes have more to do with a company’s corporate structure. An activist investor may lobby for the company to split up, to sell off specific divisions or assets, or even to merge with a competitor.
And sometimes activist investors push for strategy changes. For instance, an activist investor may try to force management to enter a new market, invest in new equipment, or even drop out of less attractive locations.
The point is that activist investors don’t just buy shares and hope they move higher. As the name implies, activist investor actively work with companies to force a company to become more profitable.
And since these investors buy large blocks of shares to give them influence over the companies, the activist investor turns a big-time profit when ideas are implemented and a company’s stock moves higher.
The good news for us is that activist investors typically take large positions (and are forced to report these positions in quarterly filings with the SEC). That gives us a chance to see what companies activist investors are buying, before the big changes are implemented…
Piggybacking Activist Investors For Maximum Profits
Over the past few quarters, we’ve had some great opportunities to invest in the same companies that activist investors are buying, and to profit from the very same shares that are lining these activists’ pockets.
I love this style of investing, because we’re able to profit from the hard work of the activist investors, but we don’t have to do any of the dirty work of convincing management teams to make changes or sell off part of their business.
Here are three quick examples of activist investor plays that we’ve been able to profit from:
Hilton Worldwide Holdings (HLT) – When I first recommended shares of Hilton to readers of Lifetime Income Report, the company was being pressured by activist investors at Blackstone Group (BX). These investors convinced Hilton to break into three distinct business.
Today, Hilton trades as three different companies. Hilton Worldwide manages the company’s franchised hotel business. A second company manages the company’s resorts. And a third business focuses on the company’s timeshare properties.
Each of the three companies has a different stock ticker. And the value of all three companies is more than Hilton was worth before the break up. Chalk up a victory for the activist investors!
Another great activist investor example is Darden Restaurants (DRI). You probably recognize the company’s Olive Garden or LongHorn Steakhouse brands. Activist investors at Starboard Value pressured the company into menu changes and cost cuts, which led to higher profits. Shares of DRI are now up 50% from where they were trading a year ago.
And most recently, activist investor Dan Loeb disclosed a large position in our Lifetime Income Report holding Nestle (NSRGY). Loeb has indicated he wants to work with the company to divest some of the less profitable brands Nestle owns, and to acquire other brands that the company could grow. Shares moved higher when Loeb’s investment was announced, and I expect NSRGY to continue to move higher as Loeb’s strategies are put into play.
As we enter the second half of 2017, I expect to find more opportunities to invest alongside activist investors.
With U.S. markets hitting new highs, it’s becoming more important for investors to have an edge when picking out investments. Simply buying shares that are trading at premium valuations is a recipe for disaster. A normal market pullback could lead to significant losses in your account.
But investing alongside proven activist investors gives you a chance to profit from situations where big changes are being made to drive big profits for investors.
I’ll be scouring the markets to find more opportunities like the ones we’ve already profited from. And as a Daily Edge reader, you’ll be the first to know about new activist opportunities that our team uncovers.
Here’s to growing and protecting your wealth!
Editor, The Daily Edge
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