The search for underpriced investment securities starts with an analysis of the company, the industry and the competition. Thereafter, if the analysis produces a worthy underpriced investment candidate, a value-creating catalyst is sought. One interesting catalyst is the presence of activist shareholders.
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Activists Provide Advantages
The presence of an activist investor offers many advantages. First, the activists usually own a sizable amount of stock, so the alignment of interest is completely shareholder oriented. Second, activists usually get involved because they see tremendous upside value. Many times, an activist shareholder first starts out as a shareholder and as a result of a continued stock price decline, the shareholder turns activist. These situations give other investors an entry below the activist's entry price.
Finally, activist investors have done some very detailed due diligence before deciding to go activist. (For more on activist investors, see Nasty Shareholder Activist Battles And Why They Happened.)
Fertile Hunting Ground
Let's look at a selection of businesses that currently have activist involvement. This list is intended to serve as one possible source of quality ideas. As always, don't just take the activist's word for it: perform your own due diligence!
First up is I-Flow Corp (Nasdaq:IFLO), a designer of drug delivery and surgical products. Discovery Equity Partners is the activist involved. It owns 5.3% of the company at an average cost of $5.61 per share. Shares now fetch $7, so Discovery has done OK so far. This week, I-Flow reported that it had returned to profitability for the second quarter. The profits weren't great, but any profit is impressive right now.
I-Flow is a $175 million company, with no debt and $50 million, or $2.05 per share, in cash. Bigger medical device players like Baxter (NYSE:BAX) could easily buy I-Flow at a premium and still be getting a good deal considering the cash on the balance sheet. (Learn more about the balance sheet in Reading The Balance Sheet.)
Bookstore chain Borders Group (NYSE:BGP) has none other than Bill Ackman of Pershing Square on board. Believe it or not, Borders Group is one of the best-performing stocks on the NYSE this year. Shares started off at around 45 cents; today they fetch $3.70. Ackman clearly believes shares are worth much more.
Other notable activist investments include cement producer Texas Industries (NYSE:TXI). The activist here is Shamrock Value Activist Fund, owner of 10.2% of outstanding shares. Shamrock is unhappy with current management and working to shake up the executive suite. (For insight on how you can affect corporate policy, see How Your Vote Can Change Corporate Policy.)
Bottom Line
Having an activist on your side is not a bad way to go, although not all activist attempts are successful. Nonetheless, examining businesses with an activist shareholder is just one quality source of ideas.
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