Here’s How To Zero-In On The Alpha Hidden In 13D Activist Filings

Here’s How To Zero-In On The Alpha Hidden In 13D Activist Filings

The 13D filing marks the beginning of the activist campaign, when an activist manager goes public with plans to enrich shareholders by closing the gap between an underperforming stock and the intrinsic value of the target company. As we discussed in the previous chapter, when an individual or fund with activist intentions crosses above 5% ownership of a company, the activist must file a SC 13D with the SEC disclosing details about his or her intentions. The  SC 13D must be filed within 10 days of an activist passing the 5% threshold.

There’s no doubt that investing in the target stocks of 13Ds can be very lucrative — if you know what to look for. Not even halfway through 2017 there are some eye-popping returns from piggybacking on activist’s 13D filings.

SC 13D Dan Loeb Daniel Loeb third point capital hedge fund manager activist investor poison pen activism Yahoo corporate governance famous investors

Top performing  SC 13D targeted stocks in 2017 through 6-20.

TypeFilerStockDate FiledStake in CompanyNext Close after 13D Filing6-20-17 Price% Return since 13D
SC 13DGAMCO INVESTORSGSOL3/27/175.01%8.1520.05146.01%
SC 13DDISCOVERY GROUPFMI1/30/175.20%19.5540.50107.16%
SC 13DLEGION PARTNERSBANC1/24/176.30%15.5121.6039.26%
SC 13DEngaged Capital LLCRCII1/30/179.90%8.4811.5335.97%
SC 13DRED OAK PARTNERS,EDUC4/12/177.15%7.9010.3030.38%
SC 13DVA PARTNERS I, LLCBIVV2/17/177.10%47.4561.3129.21%
SC 13DMARCATO CAPITALDECK2/8/176.00%52.2866.2726.76%
SC 13DJANA PARTNERS LLCWFM4/10/178.30%34.1742.9325.64%
SC 13DELLIOTT ASSOCIATESABCO1/12/172.50%42.0051.4022.38%
SC 13DVA PARTNERS I, LLCVRX3/16/175.20%11.0313.2420.04%

Source: WhaleWisdom.com and ValueWalk

But the problem with 13D-related filings is that there’s an endless stream of them. Through the first five months of 2017, over 2000 activists filed 13D-related disclosures. Faced with so much information, an investor looking to profit from new activist 13Ds must zero-in on only the most predictive filings.

A first step is to disregard 13D/A filings. While these amendments to initial 13Ds can have important information, 13D/As don’t disclose initial activist positions. About 1500 of the 2000 year-to-date filings have been 13D/As. The rest were initial 13Ds, where an activist first disclosed owning more than 5% of a target company. Here is where we want to focus.

Still, 500 filings – or about 5 initial 13D filings per trading day – are too many to deal with. And the great majority of these filings are irrelevant. We seek the activist equivalent of pit bulls — hedge fund aggressors who sink their teeth into management and don’t let go until the target stock price is much higher.

As we saw in the previous chapter, Item 4 of a 13D requires the filer to disclose the purpose of the transaction. The 13D filers we want to follow will have one or more of the following objectives stated in Item 4: board control, board representation, maximizing shareholder value, removing officer(s)/director(s), or a public short/bear raid (we’ll discuss short-selling activists in a future installment.)

According to FactSet, “high impact activism” whereby the activist lists one of the above as the reason for its purchase, accounted for 319 campaigns in 2016 — about a quarter of initial 13Ds filed during the year.

We seek the activist equivalents of pit bulls — hedge fund aggressors who sink their teeth into management and don’t let go until the target stock price is much higher.

But of course, words are cheap. If writing “maximize shareholder value” on a 13D was all it took to be an activist, then every fund manager would be Carl Icahn.

ACTIVISTS/ 13D FILERS13D’s since 201513F $ AUM 3-31-17
ICAHN CARL C919,937,172,000
GAMCO INVESTORS5115,789,617,000
ELLIOTT ASSOCIATES1913,288,792,000
VALUEACT CAPITAL1311,944,486,000
THIRD POINT LLC110,248,073,000
FARALLON CAPITAL49,114,654,000
ORBIMED ADVISORS128,822,204,000
BAUPOST GROUP LLC38,493,011,000
CARLSON CAPITAL L P57,864,837,000
GREENLIGHT CAPITAL27,194,917,000
PERSHING SQUARE35,960,734,000
JANA PARTNERS LLC65,379,994,000
BLUEMOUNTAIN54,942,602,000
SIT INVESTMENT ASSOC54,010,218,000
CORVEX MANAGEMENT33,604,924,000
STARBOARD VALUE113,264,945,000
QVT FINANCIAL LP33,219,915,000
SACHEM HEAD CAP13,086,195,000
BLUE HARBOUR GR22,775,565,000
LUXOR CAPITAL GROUP12,054,839,000
KARPUS MANAGE141,934,918,000
CLINTON GROUP INC21,720,992,810
ANCORA ADVISORS41,476,850,000
H PARTNERS MANAGE11,171,010,000
RAGING CAPITAL10972,735,000
MARCATO CAPITAL4913,033,000
SANDELL ASSET MAN2421,854,000
BULLDOG INVESTORS24388,497,000
FRONTFOUR CAPITAL3376,846,000
RED MOUNTAIN CAP2338,240,000
ENGAGED CAPITAL5323,965,000
DISCOVERY GROUP15299,842,000
SARISSA CAPITAL4253,055,000
LEGION PARTNERS6182,688,000
STANDARD GENERAL2175,740,000
SEIDMAN LAWRENCE7150,502,000
WEST FACE CAPITAL1131,303,000
VIEX CAPITAL11128,278,000
NORTHERN RIGHT CA280,682,000
Source: WhaleWisdom.com

To run a successful activist campaign, a manager must well-financed, tough and media savvy. He or she must also be a great value investor. It’s pointless to agitate for closing the valuation gap of a target company if the company turns out to be overvalued.

And crucially, an investor copying the moves of an activist will want to follow a manager who has a successful track record of profitable campaigns. It’s kind of like choosing a surgeon – any old doctor can operate, but you’d personally prefer one that hasn’t killed many patients.

The largest hedge funds primarily focused on activism have benefited from a virtuous cycle — the more money they make for investors, the more assets under management they accumulate. And the greater their AUM, the more activist campaigns they wage, and the more clout they wield.

To the left is a list of activist managers that have conducted at least one campaign since 2015. It’s by no means all-encompassing – I recommend putting together you’re own. Services like WhaleWisdom allow investors to track managers of interest and receive alerts of filings.

But a word of warning when investing in the target stock of a new SC 13D: You are “buying high.”

The price of an activist targeted stock typically spikes immediately after the 13D is filed. Depending on many factors, including the notoriety of the activist and market conditions, a target stock can close 5% or more higher the day after the initial 5%+ stake is disclosed.

And the post-filing bump is on top of pre-filing price gains. Whatever the reason – the activist’s buying driving shares higher, or insiders catching word of the upcoming filing, or a combination of factors – target stocks typically rise in the days before a SC 13D activist filing.

Some target stocks will gap higher after the 13D event and not look back, climbing steadily in the days and weeks following. But that’s the exception.

Most commonly, target stocks are volatile post-13D, and have a tendency to retrace much of their recent appreciation.

The chart below shows that in the ten days before a  SC 13D filing, the average target stock has already moved 3% to 8% higher.

13D Activist Filings SC 13D

Source: Quantopian and EventVestor

Then post 13D, the typical target stock continues

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