Activist Shareholders Can Work for You

While it is indeed true that as shareholders in any given company we are part owners, the ownership is passive. So, despite the amount of due diligence we perform, we are always investing with a degree of faith in management. Management has control over the assets of the business, and regardless of how compelling the investment idea may be, bad behavior from management can supersede all else.

As it is becoming increasingly difficult to find truly undervalued securities these days, one fertile source is to examine opportunities backed by activist investors. Like us, they are equity holders and are seeking to maximize the share price. Unlike us, they are active investors, not passive, meaning that they can control the actions of management.

Steak n Shake (SNS - commentary - Trade Now) deserves a very close look. This quick-service restaurant is being looked after by the Lion Fund, an investment partnership headed by the young activist investor Sardar Biglari. Biglari has been chairman of another restaurant group, Western Sizzlin (WEST - commentary - Trade Now), so he has had experience taking restaurants that were poorly run and mismanaged and turning them around.

Biglari has been an investor in Stake n Shake for well over a year, first as a passive holder. Biglari was investing in Steak n Shake when shares were in the mid to high single digits, and late last year the shares sank below $3. During that time, Biglari initiated his campaign for change at the company, which culminated in him becoming CEO of Steak n Shake.

Today the shares are just above $11, but Biglari is in it for the long haul, and it appears he still likes the company's value proposition: at the end of August, he bought nearly 124,000 shares at an average price of $10.65 a share. A few weeks before that, filings show that he bought another 107,500 shares for just over $10.

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At the time of publication, Gad had no positions in stocks mentioned, although positions may change at any time.

Sham Gad is the managing partner of Gad Capital Management, a value-focused investment firm based in Athens, Ga. Gad has written extensively for The Motley Fool and was a securities analyst for UAS Asset Management, a small value investment fund in New York City, in 2007. Previously, Gad managed assets for the Gad Investment Group.

Gad runs a value-investing blog inspired by the teachings of Benjamin Graham. Additionally, he is currently working on a value investing book to be published by John Wiley & Sons in the fall of 2009. Gad earned his BBA and MBA at the University of Georgia. Gad appreciates your feedback; click here to send him an email.