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Can Investing With Activist Investors Produce Alpha?

Investing the day after an activist investor announces a large stake can produce alpha. The strategy over 34 activist stakes generated 18.12% per year, nearly 4% more than the S&P 500. We can replicate the process through 13F and 13D filings. The hedge fund industry’s current AUM is about 2.5 trillion. Of that number, about half is allocated to public equity and an even smaller number is dedicated to activist investment. So why do we care about activist investment so much? Perhaps it is American sensationalism or maybe we just like a good story, but whatever it is, every day we hear from the likes of Carl Icahn or Bill Ackman on CNBC, or in another media outlet. These brilliant and powerful investors outline their plan to unlock value in company XYZ, as if they are screaming from the top of the mountain for all to hear, through share buybacks, managerial shakeups, spin-offs, or other strategic planning and then back up their story with war chests full of their investors’ capital. As average investors, we are intrigued to see what the pros are doing, but we do not have access to these investors’ funds. So, how do we join in on the fun with these modern-day yodelers? We follow them closely and invest with them. But will this strategy generate alpha? The following study will provide the conclusion. I looked at 34 previous activist investments from some of the biggest players in the business. I took the share price of the day after the activist announced a position and marked this as a buy. We can follow activist activity through 13F filings online and through 13D filings in Barron’s. I then compared it to the day after the activist either won or lost proxy vote, or exited the position. The study will focus on long only as many average investors do not short or have the capability to do so. For example, we would buy Valeant Pharmaceuticals (NYSE: VRX ) the day after Bill Ackman announces a hostile takeout bid for Allergan (NYSE: AGN ), and then sell Valeant Pharmaceuticals the day Allergan rejected the offer and took the actavist’s bid. I then compared the returns of the individual stock to the market return of the S&P 500 over that time period to find if investing alongside the most famous hedgies in the world can generate alpha. Please read through for the data and the conclusion. Company Activist Activity Date Bought Date Sold Total Time held Share Price Buy Share Price Sell P/L S&P 500 Return Beta of Stock Reason for Activism Pershing Square Capital Management Allergan and Valeant 4/21/2014 10/18/2014 0.49 135 142 5.19% 0.79% 0.46 Buy out of Allergan. I calculated until the failure date to purchase Allergan. Pershing Square still owns a large portion. Bill Ackman J.C. Penney (NYSE: JCP ) 10/9/2010 9/2/2013 2.90 34 14.27 -58.03% 41.00% 1.34 Shake up of company. Appointment of Ron Johnson to CEO. Board Member. Failure. Air Products and Chemicals (NYSE: APD ) 9/1/2013 6/26/2015 1.82 109 143.83 39.95% 28.21% 1.42 Shake up of management, mainly CEO. Canadian Pacific Railway (NYSE: CP ) 10/31/2011 6/26/2015 3.66 61 162 167.67% 67.75% 1.07 Shake up of management. Trian Partners Nelson Peltz DuPont (NYSE: DD ) 7/18/2013 5/18/2015 1.83 57 70 27.81% 25.83% Spin-off of chemical units, break up of company. Tiffany (NYSE: TIF ) 2/27/2007 9/30/2011 4.59 45 63 48.00% -18.44% 1.93 Management shakeup. Undervalued. Wendy’s (NASDAQ: WEN ) 5/3/2008 6/26/2015 7.15 7.35 11.4 66.10% 51.43% 0.51 Management shakeup. Undervalued. Icahn Enterprises Carl Icahn Apple (NASDAQ: AAPL ) 10/25/2013 6/26/2015 1.67 75 127.5 72.50% 19.47% 1.07 Share buyback. Undervaluation. Dell 3/7/2013 9/10/2013 0.51 14 13.85 0.43% 8.56% — Transocean (NYSE: RIG ) 1/15/2013 6/26/2015 2.45 56.76 16 -62.81% 42.71% 1.6 Increase dividend. Undervalued Navistar (NYSE: NAV ) 11/20/2011 6/26/2015 3.60 38 22.75 -40.13% 81.44% 3.12 Restructuring. Management changes Starboard Value Jeffrey Smith Darden (NYSE: DRI ) 12/23/2013 6/26/2015 1.51 54.5 71.83 37.80% 15.01% 0.69 Restructuring, reevaluate strategic positioning, and managerial changes. MeadWestvaco (NYSE: MWV ) 6/3/2014 6/26/2015 1.06 43.63 47.89 17.76% 9.25% 0.55 Spin-off of specialty chemicals unit, undervalued, and sale of company. Brink’s (NYSE: BCO ) 5/4/2015 6/26/2015 0.14 30.61 30.23 -1.24% -58.00% 1.72 No plans as of yet. Office Depot (NASDAQ: ODP ) 8/8/2013 6/26/2015 1.88 4.2 8.89 111.67% 23.85% 2.75 Push for OfficeMax deal and sale of company to Staples (NASDAQ: SPLS ). AOL (NYSE: AOL ) 12/22/2011 6/15/2012 0.48 15.5 25.5 64.52% 6.13% — Managerial shakeup. Loss in proxy vote. Smithfield 6/18/2013 9/26/2013 0.27 33.11 33.99 2.66% 4.28% — Attempted breakup of company and sale. Failure and Chinese takeover by Shanghui took place at 34 a share. Gamco Mario Gabelli Brink’s 12/16/2014 6/26/2015 0.53 22.92 30.17 32.38% 6.57% 1.72 Gabelli claims that Brink’s is undervalued and should be private. Griffin Land (NASDAQ: GRIF ) 11/26/2013 6/26/2015 1.58 33 32.26 -1.49% 16.62% — Gabelli wants GRIF to examine itself as a REIT or MLP. Superior Industries (NYSE: SUP ) 11/26/2013 6/26/2015 1.58 18.9 18.69 4.89% 16.62% 0.93 Gabelli wants a share repurchase program. Third Point Dan Loeb Yahoo (NASDAQ: YHOO ) 10/3/2011 7/29/2013 1.82 15.47 27.65 78.73% 49.66% 1.46 Proxy vote success and shake up of board. Marissa Meyer new CEO. Jana Partners Barry Rosenstein McGraw-Hill (NYSE: MHFI ) 8/2/2011 9/12/2011 0.11 37.77 40.51 7.25% -7.78% 1.64 Breakup of company. Marathon Petroleum (NYSE: MPC ) 1/21/2012 2/20/2012 0.08 31.24 35 12.04% 4.15% 1.02 Operational changes to company and potential breakup. Agrium (NYSE: AGU ) 10/20/2012 3/5/2014 1.38 68.7 93.56 43.19% 30.69% 0.87 Return of capital to shareholders and split business. Ashland (NYSE: ASH ) 4/28/2013 5/13/2015 2.04 86 128.59 52.52% 31.81% 0.71 Restructuring, recapitalizations, spin-offs. Safeway (NYSE: SWY ) 8/20/2014 1/29/2015 0.44 24 35.1 46.25% 1.45% — Merger arb. and restructuring. QEP Resources (NYSE: QEP ) 10/22/2013 10/16/2014 0.98 32.9 23.33 -29.09% 6.66% 1.23 Midstream unit breakup. Elliot Management Paul Singer Hess (NYSE: HES ) 12/1/2012 6/26/2015 2.57 50 68.48 40.96% 49.16% 1.78 Managerial shake up and capital allocation changes. ValueAct Jeffrey Ubben Adobe (NASDAQ: ADBE ) 12/27/2011 1/13/2015 3.04 38.13 74.04 98.18% 58.32% 1.31 Managerial shake up. Moody’s (NYSE: MCO ) 7/20/2011 6/26/2015 3.93 35.61 110.2 213.46% 56.30% 1.36 Managerial shake up. Motorola 7/17/2011 6/26/2015 3.94 46.5 58.1 33.95% 56.30% 0.59 Work with management to unlock value. Relational Ralph Whitworth Occidental (NYSE: OXY ) 8/3/2010 5/3/2013 2.75 72.35 85.58 27.29% 43.22% 1.17 Removal of CEO, Ray Irani. Clinton Group Greg Taxin Violin Memory (NYSE: VMEM ) 12/19/2013 10/16/2014 0.83 4 4.16 4.00% 2.44% — Sale of company. (Taxin leaves Clinton Group on 10/16/14) XenoPort (NASDAQ: XNPT ) 10/15/2013 10/16/2014 1.00 6.02 6.41 6.48% 8.20% — Replace CEO. Total 34 Averages: 1.90 34.44% 26.93% 1.31 Return Per Year: 18.12% 14.17% Based on the data set, we see that following activist hedge funds does produce alpha. Over the course of the average investment of 1.90 years, the activist strategy returns an average of 18.12% per year versus the S&P 500 return of 14.17% over that time period. However, not taken into account are the trading costs of the transactions or the value of your time following the hedge fund activists. One important aspect to consider is that the average betas of the stocks are about 1.31. The higher return of the activist hedge fund strategy could just be a product of taking on more volatility to the market and may not represent any innate stock-picking ability. Another aspect to consider as an investor is whether or not activists add value (if you care about such a thing), as this can be widely debated. Did Valeant or Allergan add value when Ackman attempted to play matchmaker? Probably not, but there was still money to be made. Another important aspect to consider is when this study was done. All of the activist investments were done during the recent bull market that has generated returns of over 200% in six years. It has been shown that activists can even beat the market in periods of rapid asset appreciation, so I would hypothesize that a strategy of following activist investors would also be successful in a sideways or bear market. However, I do not have the empirical research to prove such a claim as the proliferation of activist investors has only just begun. This can provide a potential issue. As activist investors prove to make a lot of money and beat the market, we will see an influx of assets to this strategy that could dull down returns. I believe that this will not be an issue as you should always follow the big guys that have been doing this type of investing for a long time, for example, Bill Ackman, Dan Loeb, Mario Gabelli, Carl Icahn, Jeffrey Smith, Nelson Peltz, and Barry Rosenstein. There is one takeaway that is important to note after conducting this study. Picking activist investors are just like picking stocks, some are good during some times, and some not. Not all activist investors will always lead to gains every time, just like stocks. My advice is to evaluate an activist pick and only if you like the stock independently of the activist involvement, then buy in, otherwise you are better off in an index, like the SPY or MDY . If you do not know why you own something, don’t own it. Do your own work, but you can use these guys as idea generators. Do not follow Carl Icahn blindly into battle, even if he seems to be on a hot streak, because the market humbles everyone, even Mr. Icahn. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Duke Energy Should Be On An Income Investor’s List

The company is streamlining its operations and focus on growth should propel its stock price. Increased revenues and cash flows from growth projects should result in increased dividend growth. Current price represents a good entry point for long term investors. Duke Energy (NYSE: DUK ) has had mixed fortunes over the past five quarters. The revenues and earnings of the company have been fluctuating, which is odd for a large utility like Duke. The trend in the stock price has been consistent with the trend in its revenues and earnings over the last twelve months. It touched $90 in January but could not maintain that level and the stock has been on a declining trend over the last six months. This, I believe, has created a good entry point for income investors. Duke Energy has been repositioning its business by selling its competitive business assets. The company has strategic growth plans that involve getting an extended, renewable energy generation asset base; such plans will benefit the company in the long-run, as the company’s revenue and cash flow growth will improve which will reduce shareholder risk and maintain investors’ confidence in the longer term. The company is seeking an opportunity to invest in Green projects worth $4 billion which will further boost its growth. It has also plans for the accelerated investments in solar, biomass and natural gas. Duke also plans to convert its coal field plants to natural gas ones in order to have larger asset base. However, this is a long-term investment, approximately 4 to 5 years horizon should be kept in mind. It will be a joint venture to service more territories with expanded gas generation. As a result, this huge investment will boost growth that in return will increase revenues and maintain stable cash flow base. This will have a significant positive affect on the DUK’s share price. On the other hand, the recent sale of non-regulated Midwest assets and the subsequent buy back of shares will increase the company’s earnings per share. It will also allow DUK to repay debt and make its financial position stronger. Duke Energy also has plans to access some cash, in the form of unremitted international business earnings, in the next 8 years that will have a positive effect on its performance. This will allow the company to grow its profitable operations and expand its natural gas pipelines in North Carolina, as discussed above, to cater for more demand. Furthermore, the cash from international business segments will finance future growth and create value for its shareholders in the longer term. Duke energy is a good investment for income investors – it yields a return of 4.1%, with dividends paid quarterly. All of the above repositioning strategies will accelerate dividend growth for the shareholders. It will also improve the overall business risk of DUK and make investors more confident as it will also lower the shareholders’ risk. However, the company will remain exposed to the risk of sudden changes in regulatory restrictions. In addition, any carelessness exhibited by company’s management during the execution of its planned investment might hinder its future growth potentials. Furthermore, unforeseen negative economic changes, foreign currency volatility and adverse weather conditions are key risks that might restrict its stock price performance in the years ahead. Duke’s long term prospects look good. However, with the demand growth in the US expected to slow in the coming years, Duke Energy might face some difficulties on the revenues front in the domestic market. As a backup plan, it can still generate growth with its international energy business by focusing on overseas operations. Duke has effectively modified its portfolio with wind and solar power projects lined up for the future. Most importantly, this company also remains committed towards enhancing operational efficiency and cutting down costs to further fuel earnings growth. In conclusion, Duke Energy had a successful 2014, is off to another strong one this year, and if all goes according to the plan, it will pass along another dividend increase to shareholders very soon. The company’s share price is currently following a declining trend, but with revenues and earnings expected to rise due to the growth projects, there is a lot of upside to the share price. For income investors looking for a stable, secure, high-yield investment opportunity, Duke Energy should certainly be considered. Disclosure: I am not a registered investment advisor and the views expressed in this article are my own. These views should not be taken as an investment advice or recommendation to buy or sell the shares. Investors should conduct their own due diligence before making an investment decision. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The Joy Of Portfolio Boredom

The word boring is worth exploring further as it is a very important building block of long-term investment success. Getting rich slowly or maybe the more modest goal of getting financially comfortable slowly means some pretty plain vanilla portfolio construction. The more exciting a portfolio is on the way up, the more “exciting’ it will be on the way down. Last week I stumbled across an article that favorably critiqued an alternative-strategy ETF for being boring which is its objective. “Boring” is not the stated objective in the prospectus but terms like market neutral, absolute return, low correlation to equities and some others really are about boredom. You can judge for yourself whether a given fund that is supposed to be boring is indeed boring, as not every fund will deliver on its stated objective. The word boring is worth exploring further as it is a very important building block of long-term investment success. Ten years ago I wrote a post called Getting Rich Slowly and while I have no idea whether the phrase was a Random Roger original, I think it captures the path that most people want to take in terms of realistic participation in capital markets. Getting rich slowly, or maybe the more modest goal of getting financially comfortable slowly, means some pretty plain vanilla portfolio construction. How you get to plain vanilla probably depends on the level of engagement you want to have in markets but from the top down it should start with blending together things like equities, fixed income and a small slice to alternatives (what for years I’ve been referring to as diversifiers) with relatively simple products and/or individual issues in such a way where all three sleeves avoid trading in lockstep, but over a long period of time gives a chance for having enough money when you need it, which presumably is at retirement. As we have discussed many times before, one of the biggest impediments to long-term financial success is succumbing to emotion at the worst possible times, which can mean panic selling your portfolio at a low or repeatedly panic buying hot stocks at their highs after a pundit just extrapolated past returns on stock market television. I had the opportunity to moderate a panel that included Dr. Richard Thaler about behavioral economics/finance, and one thing he talked about as a very common bias is loss aversion, which basically means that pound for pound people feel losses far more than they feel gains. Take that out a little further and it explains why people often react to large declines like they’ve never happened before; the tendency to think this one is different. The more exciting a portfolio is on the way up, the more “exciting’ it will be on the way down. Investors of course don’t mind excitement when it is resulting in gains, but the longer it goes on, the more complacent they become in terms of forgetting the last decline or using hindsight bias to explain away the last decline. Investors don’t want boring until the market peaks out, which of course is plenty guessable but not knowable. If there is no way to know when the market will peak and losses trigger twice the emotion that gains do, then right there is the argument for boring all of the time. Again, the context for boring is not no equities but if you can buy into the idea that an adequate savings rate, proper asset allocation and not panicking are the most important determinants to long-term portfolio success then the focus shifts more in line with the true long-term objective. You are very unlikely to remember what your portfolio did in the 3rd quarter of 2013 or what the market did that quarter, without looking, because it doesn’t matter in the context of your long-term financial plan. An exception would be if that was the quarter you retired. The only other way some random calendar quarter from your past is likely to matter is if you made some sort of catastrophic mistake like selling out in the first quarter of 2009. The conclusion for me is a diversified portfolio of equities that at the very least offers decent upside participation, fixed income exposure that offers some ballast to normal equity volatility and a little exposure to diversifiers, as I said above, that hopefully allows for managing volatility and correlation such that the potential for panic is at least partially mitigated. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice and the information contain within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk which may result in investors losing all of their invested capital. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs visit our website AdvisorShares.com .