This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

It Pays to Trade Like an Activist Investor

Stocks in this article: JCP FO WEN THI LLY

By Marc Lichtenfeld

Every year, a tiny group of investors quietly outperform the stock market by more than 20 percentage points.

They're tough, direct, no-nonsense guys -- and are arguably the best people to have fighting for everyday investors like you and me.

They're called activist investors.

So who are these guys? What do they do? And more importantly, what can they do for you?

"Activists" by Name ... And by Nature

An activist investor is someone who owns a stake of 5% or more in a certain company and wants to make changes. They're required to file a 13D document with the SEC, outlining the demands they're making from management.

Those demands often include...

  • The sale of the company or certain assets.
  • Instituting a share buyback or special dividend.
  • Firing the CEO or replacing members on the board of directors.
  • Reining in executive compensation.

You can see why they're called "activists!" But these demands all have one goal in mind: to unlock shareholder value -- i.e., make the share price rise.

So who are the big activist players?

Activist Investors Hit Headlines

Last week, one of the most prominent activist investors hit the headlines, as hedge fund manager Bill Ackman took large new positions in J. C. Penney (JCP) and Fortune Brands (FO).

And Ackman has overseen several other notable activist campaigns, too.

For example, he got Wendy's (WEN) to spin off its Tim Hortons (THI) unit. And investors who followed him into McDonald's (MCD) have seen their shares double. However, Target (TGT) was a famously disastrous position for Ackman and his investors. Having put all his fund's capital into Target options, the fund lost 90% of its value.

As for the other heavy-hitters...

Successful Activist Investors to Watch

Extremely successful activists that I keep a close eye on include Dan Loeb of Third Point, Barry Rosenstein of Jana Partners and Carl Icahn.

And they're all similar to Ackman in that they're incredibly smart, driven and opinionated (as most activists are).

For example, Loeb has notched up many victories, but he's perhaps better known for his scathing letters to ineffective CEOs. (These letters are submitted as part of the 13D filings.)

For example, he once wrote to former Star Gas Partners (SGU) CEO Irik Sevin and lashed out: "Do what you do best: Retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites." Sevin did in fact retreat. He resigned a short time later.

And Loeb once said of his own company: "I suppose if Third Point were to have a Web site, rather than the feel-good background of two shaking hands, we would likely depict a well-worn boot colliding with the backside of an incompetent manager."

Over at Rosenstein's Jana Partners, the firm recently recorded a win when it forced Charles River Laboratories (CRL) to withdraw from its high-priced acquisition of WuXi Pharmatech (WX) and instead institute a stock buyback.

And the legendary Carl Icahn is known for many activist investing successes. One of the biggest was when he bought up shares of ImClone Systems below $30 and promptly took control of the board of directors. He ultimately ended up selling the company to Eli Lilly (LLY) for $70 per share.

1 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,778.15 +421.28 2.43%
S&P 500 2,061.23 +48.34 2.40%
NASDAQ 4,748.3960 +104.0840 2.24%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs