This Day On The Street
Continue to site
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

An Active Strategy

I keep track of activist investors as a matter of course as they often identify undervalued stocks and are successful at unlocking value in the form of a higher stock price. If you get in early enough quite a bit of money can be made riding their coattails. It is harder to do with the big guns like Carl Icahn and Bill Ackman as even a whiff of their involvement can send shares leaping almost immediately. But there are smaller investors who are pushing for changes at companies worth notice.

I have held shares of Cliffs Natural Resources (CLF - Get Report) for some time and seen the stock pull well off its highs. We had a big gain in the stock that has contracted to a much smaller one as fears of a weak economy, slower growth in China and excess iron ore have weighed on the share price. The stock is higher Tuesday afternoon as an activist investor has the stock squarely in its sights and is agitating for a major shakeup at the company.

Casablanca Capital was formed in 2010 by Donald Drapkin and Douglas Taylor and has had a decent start as an activist firm. This morning the firm announced that it had accumulated more than 5% of Cliffs and advocated radical changes to the company that would unlock shareholder value in a very big way.

In a letter filed with the Form 13D to the Securities and Exchange Commission, the hedge fund suggested that Cliffs double its dividend, spin off its foreign assets and convert the U.S. assets to a master limited partnership. Casablanca also wants Cliffs to significantly cut Selling, General and Administrative Expenses and exploration costs, as well as divest infrastructure and other non-core assets. They have met with Cliffs' management twice in the last six weeks and Cliffs has released a statement that they "look forward to continuing the dialog to better understand their assumptions, projections and overall views."

Must Read: Cramer: Facebook Is Fastest Growing Big-Cap Stock in America

Casablanca estimates that these measures will unlock the full value of Cliffs' shares, which they estimate to be $53, more than double the current price even after this morning's news-related bounce. The stock trades at just 60% of book value, so anything that increase the market's valuation of the company could lead to huge price gains, even if they fall short of Casablanca's estimate.

Insiders own less than 1% of the shares and most of the other institutional investors are large mutual funds that may be inclined to go along with anything that increases the stock price, so if this gets nasty, the activists probably have an edge.

The activist situation at Commonwealth REIT (CWH) is coming closer to a resolution. Hedge fund Corvex Management and Related Cos., the large real estate concern, have been pushing for the removal of the entire board at Commonwealth, and after months of legal wrangling, they are closer to forcing a shareholder vote to elect a new board. The activists, who own 9.6% of the company, have cited Commonwealth's long-term record of "worst-in-class" corporate governance and accused it of wasting tens of millions of dollars of shareholder money.

Commonwealth had tried to offer the activists a board seat but it was turned down in favor of a consent solicitation to replace the board. An earlier effort, which Commonwealth successfully challenged in arbitration, received the support of 70% of shareholders. I see no reason why an action conducted with the guidance of an arbitrator should not receive the same if not more support, allowing the activist to take control of the REIT.

The shares trade around book value but are well short of the more than $40 value the activist investor has suggested the shares are worth with better management and operating policies.

I like following activist investors and I attempt to piggyback on their ideas. I like it even better when they take a position in stocks I already own, like Cliffs and Commonwealth, and take aggressive measures to drive the value of my shares higher.

At the time of publication, Melvin was long CLF and CWH, 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.

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment 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 serious 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

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
Real Money
Try it NOW

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums


Chart of I:DJI
DOW 16,472.37 +200.36 1.23%
S&P 500 1,951.36 +27.54 1.43%
NASDAQ 4,707.7750 +80.6910 1.74%

Our Tweets

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs