Hedge Fund Report: Activists Don't Always Shout

Shares of Zoltek(ZOLT Quote), the St. Louis-based carbon-fiber manufacturer, declined sharply Friday after the company filed an S-1 registration form announcing that it would issue 7 million additional shares for the conversion of its convertible debt.

Investors reacted strongly even though the registration filing was expected. The 5.6% decline was "a sign that the market is weak in general," says David Edwards, an analyst at ThinkEquity Partners, a research and investment boutique firm, who has a buy rating on the stock. "I'm not concerned with the registration statement."

Hedge fund activist Dan Loeb, who runs Third Point and who is the largest shareholder in Zoltek, seems to believe in the long-term prospects of the stock in spite of the slide. Two weeks ago, he disclosed a 7% stake in the company in a 13-G filing. The filing was unusually quiet, with no letter attached. That's in contrast to the typical missives to management Loeb publicizes in his filings, which have earned him the reputation of being a bully.

In his most recent campaign, for instance, he lashed out at the "extravagant" compensation of Massey Energy's(MEE Quote) CEO. This time, the hedge fund had no comments.

"Loeb seems happy with the company. It's a long-term investment. It's not an activist play," says one sell-side analyst who requested anonymity.

Here's why: Zoltek enjoys a quasi-monopoly position in the commercial carbon-fiber market. The market for those synthetic materials is divided between commercial goods (such as wind turbines) and aerospace applications (fibers for airplane brakes). Zoltek produces nothing but commercial carbon-fiber products and it dominates this market.

"The aerospace sector is growing so fast that Zoltek's biggest competitors, such as Toho Tenax and Toray Industries, haven't had a chance to focus on the commercial applications," says William Gregozeski, analyst at CapStone Investments, who has a buy rating on the stock with a $42 price target. It would take a company entering the commercial carbon-fiber market today at least two years to compete with Zoltek, he adds.