Activist Investing Strategies aim to Boost Shareholder Value

Hedge fund investing

Hedge funds and others using activist investing strategies can push companies to higher levels of profit and efficiency

In general, activist investing strategies are used by hedge funds and other large investors, or groups of investors, in an individual company to push the firm to boost shareholder value and ultimately pushing up its share price.

Armed with a strong stake in a company, activist investors push management to trim expenses, unlock hidden value and, often, spin off valuable assets.

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Activist investing strategies can offer long-term rewards

Activist investing has surged in the past decade, led by a relatively small but powerful group of hedge funds. They follow different activist investing strategies, but all have the same goal: wringing the greatest possible profits from the company’s assets.

This could include forcing a change in its board of directors, bringing in new management, selling off under-performing divisions, spinning off units to unlock value, or even selling the entire company.

An activist’s target company doesn’t always follow the advice; when it does, that advice doesn’t always bring the desired effect. Still, activist interest alone does generally draw investor attention to a target stock’s underlying value.

The activists hold the same shares as other investors, so we think that their self-interest can generally be a positive for all shareholders.

Activist investing strategies can spur a profitable spinoff

To create a spinoff, a company sets up one or more of its divisions, or subsidiaries, as an independent company, then hands out shares in that new firm to their own shareholders as a special dividend, or spinoff.

Often, the parent company starts by selling a portion of the new company to the public, to establish a market and a following among investors. That way, by the time the spinoff occurs, stock in the new company may be liquid enough to be sold relatively easily, or retained with some confidence as a worthwhile investment.

As a general rule, Successful Investors are better off buying more of any spinoff stock they receive, rather than selling it. In fact, many studies have shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years.

Activist investing strategies focus on hidden assets

Company managers naturally prefer to acquire or expand their assets, not get rid of them. Getting rid of assets reduces a company’s total potential profit. The management of a parent company will only hand out a subsidiary to its own investors if it’s nearly certain that the subsidiary, and the parent, will be better off after the spinoff than before.

The best time to find hidden assets is when they’re still hidden, long before the company begins taking steps to profit from them. Understanding and seeking out hidden assets while you’re evaluating a stock can add enormously to your profits in the course of an investing career. But Successful Investors need patience to profit from them, because they can stay hidden for a long time after you buy.

If you buy a stock for its hidden assets, but those assets stay hidden or ignored by investors— or turn out to be less valuable than you thought—it can’t hurt you much. By definition, a stock’s hidden assets have not had much impact on its price. If you paid little if anything for the assets, you have little to lose. But the best hidden assets will eventually expand a company’s profit, grab investor attention, and push up its stock price.

Bonus Tip: Dividend with activist investing strategies

Even though the best dividend stocks can be your most profitable investments, dividends rarely get the respect they deserve, especially from beginning investors. That’s because a dividend-paying stock’s yearly 2% or 3% or 5% yield barely seems worth mentioning alongside yearly capital gains of 10%, 20% or 30% or more.

The best dividend stocks like to ratchet their dividends upward over time—holding them steady in a bad year, and raising them in a good one. That also gives you a hedge against inflation. If you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks.

For a true measure of stability, focus on companies that have maintained or raised their dividends during economic and stock market downturns. These firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth.

Use our three-part Successful Investor approach when making any of your investment decisions

  1. Invest mainly in well-established companies
  2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities)
  3. Downplay or avoid stocks in the broker/media limelight.

Activist investors can be highly influential and controversial. Do you agree with the type pressure they can apply to the management of a company?

What has been your experience with stocks that attracted activist investors?


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