Riding Activist Investors to Profits

In recent years, one of the most talked about investing styles has been activist investing, as investors like William Ackerman of Pershing Square have staked out large positions in various companies. It makes for great headlines, but can average investors piggyback their way to profits off of this news? I confess to being a bit of a geek, so I went to the numbers and the academic reviews of the subject.

As it turns out, piggybacking does work, and in fact, extraordinarily well. One of the first studies I found was from the Harvard Business School by Robin Greenwood and Michael Schor. It had some interesting conclusions about the success of the activist investor.

In situations where activists were able to force a transaction, such as the sale or merger of a company, the stock outperformed the market by about 7%. In situations where no transaction was completed, the target companies matched the market. The study also concluded that a transaction was much more likely once an activist investor took a position. In fact, about 25% of the time, some sort of transaction was concluded.

If a quarter of your portfolio gave you a 7% edge and the rest matched the market, that would give you a substantial 1.75% long-term edge on the market. In his book, "Investment Philosophies" (if you have not read it, you should), Ashworth Damodaran also concludes that activists have a positive influence. He found that there was positive outperformance not just for takeovers, but for corporate management changes and asset spinoffs as well.

One study examined the impact of being placed on the Council of Institutional Investors focus list. The council is a group of large investors who release a list of poorly performing companies for coordinated institutional activist activity. The companies targeted end up outperforming the market by over 11%, as the funds coordinate to pressure management to make positive changes.

---

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

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.