Open Book: Pick Stocks Like an Activist Investor

My job as a reporter at The Deal magazine and Daily Deal newspaper is to write about the most credible and successful activist hedge fund managers, identify both their goals and incentives, and compare that to the message and performance of management at the company they are targeting.

These investors are much smarter than me, but over the past seven years I have tracked them down to explain how they operate. A wide variety of activist hedge fund managers have taken the time to let me interview them in the U.S., Europe and Asia. I've put everything I have learned about their popular and expanding craft in a new book called Extreme Value Hedging.

Good Activist Investors = Great Stock Pickers

Good activist investors, at their core, are great stock pickers.

Most experienced activist investors typically allocate capital to companies that will improve in value on their own, over a period of time. But, unlike mutual funds or other institutional investors , these insurgent investors won't sit back patiently and wait for that growth to happen.

Instead, activist investors, backed by an increasing amount of both high-net worth and institutional money, identify undervalued corporations, buy large minority stakes and do everything they can to make sure their investment's stock price is on an upward trajectory. To accomplish this goal, activists engage in a wide variety of tactics: anything from collaborating with management behind the scenes to pressing for a value-enhancing merger . Though public perception of activists has them always pressing for mega-deals, just as many of them can be found blocking mergers they consider illogical or destructive.

In some cases, divestitures are in order. A group of activists have been publicly prodding armored car transport company Brink's (BCO Quote), since 2004, with positive results. Its stock has more than doubled to over $50 a share over the course of their public agitation campaign, but the activists aren't ready to leave things alone yet. Greedy? At least one of the insurgents reports that, based on its "sum of the part" analysis of the company, it should be worth as much as $81 a share.

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