How to Invest with Activists

Some would say that today’s market has become too efficient. With the advent of computer trading programs, in-depth research platforms, and teams of analysts following every whiff of data, the small investor might feel outgunned. In order to combat these challenges, large hedge fund players may try to force companies to unlock value, by purchasing large chunks of shares. With investors like Bill Ackman, Carl Icahn, and Daniel Loeb roaming about, it would be all too easy for individuals to stick to index mutual funds. That being said, there is a way for small investors to band together to fight back.

Under Pressure

An activist investor is described as one that uses an equity stake in a corporation to put public pressure on its management. There are normally two reasons an activist takes a position in a company. The first, is to attempt to increase shareholder value. The second, is to try and push a company to make changes to its policies for environmental or political reasons.

No matter what reason the activist gets involved, there is a typical timeline that investors can follow. First, the activist will identify a company ripe for improvement, and acquire a significant stake in the company. The company or individual, must file a 13D to show their acquisition of 5% or more of the outstanding stock. Second, the activist will normally explain through social media, or traditional media, why they acquired their stake, and what they hope to accomplish.

If the purpose is to improve shareholder value, selling underperforming divisions, increasing share buybacks or dividends, or replacing board members might be suggested. Third, the activist will call on other shareholders to joint their cause, attempting to put pressure on management.

This third stage may be short-lived, or prolonged, depending on how extensive the demands are, and the company’s response. The final stage is, either compliance by the company with the activist’s demands, or an exit of the position by the activist, sometimes both at the same time.

Activating Value

There are several obvious challenges facing small investors, if they want to duplicate what activist investors can achieve. Even with these issues, investors are usually rewarded by following the activist path. A study of 2,000 “interventions” from 1994 to 2007, found that stocks tend to rise about 6% in the first year after activists get involved. In addition, this study found that the shares continued to outperform after the initial involvement.

Two recent case studies come from the famous activist Carl Icahn. In February 2014, Icahn sent a letter to eBay (NASDAQ: EBAY) shareholders, detailing multiple issues with the company’s board, and potentially lost value. One of the main thrusts of Icahn’s purchase of eBay stock, was to try and pressure the company to split eBay’s Marketplaces business from PayPal. Two months into his fight with the company, Icahn got his choice of an independent director to be appointed to eBay’s board. In a more than ironic move, roughly five months later, eBay announced it would split its Marketplaces and PayPal businesses into two publicly traded companies.

In another example, Icahn took a stake in Netflix (NASDAQ: NFLX) in 2012 calling the company out as a target for acquisition by a larger suitor. He thought companies like Microsoft, Verizon, or even Amazon would benefit by acquiring the online streaming video leader.

Icahn’s purchase price was $58 a share, and his appreciation of the company got plenty of attention from other investors. In just 14 months, the stock rose more than 450%. Icahn said recently that he believes he sold Netflix too early. The fact that the stock has more than doubled again since he sold suggests that he is right.

Invest Like a Billionaire

The challenge for smaller investors trying to duplicate activist investors actions is obvious. An individual like Carl Icahn would seem to have numerous advantages over you or I. He tweets about a position in Apple stock, and his roughly 250,000 followers disseminate the information through social media. In addition, his purchases are normally measured in hundreds of millions, or billions of dollars.

With this backdrop, how do small investors compete? Individuals normally can only afford a few hundred or a few thousand shares. In addition, individuals normally don’t have the social clout to widely publicize their holdings. Since large investors go after multi-billion dollar companies, it seems logical that smaller investors should focus on small or medium sized companies.

Small investors are told many times to stick to mutual funds, which allow them to pool their resources to acquire a diversified portfolio of stocks. Instavest is different from a mutual fund, and is one way that small investors can achieve an activist role in individual stocks.

Lead investors choose a company to buy, and explain their reasoning behind acquiring the shares. Co-investors can choose to follow this investing thesis, and can even choose to link the sale of their shares to the lead investor.

There are several ways that this lead investor, and co-investor relationship, can achieve an activist type of function. First, the pooling of funds allows the acquisition of far more shares than an individual could achieve alone. Second, investors can use their combined influence to vote on, and propose new actions, that may enhance shareholder value. Last, these investors can use their combined social media connections, to multiply their ability to apply pressure on the company to make changes.

In the end, Instavest provides a way for small investors to pool their influence to activate shareholder value. Since trade commissions are very reasonable, and the platform doesn’t require a large dollar amount to invest, you don’t have to be a millionaire to invest like one.

Want to drive shareholder value? Get $50 to join the world’s best activist investors on Instavest now.