“New ‘Active Shares’ Let You Influence the Price of Your Stocks”

By Travis Johnson, Stock Gumshoe, October 21, 2010

That headline came across my desk on a tease from Marc Lichtenfeld, who I’ve certainly covered in the past — but this time, he’s teasing a brand new advisory called The Activist Trader that apparently hasn’t even started publishing yet.

So in case you’re tempted to become one of his guinea pigs, let’s look and see what it is he’s touting, shall we?

This “Active shares” concept is relatively reasonable — by “relative,” I mean in comparison to the other kinds of invented terms and misleading titles given to many other newsletter investing strategies in order to confuse, titillate or entice (ie, Scandinavian Income Certificates, Mainz Income, MicroQuakes, etc, to name just a few recent ones).

I’ll spare you some of the detail, but essentially Lichtenfeld says that most people buy a stock and just have to pray that it goes up eventually — whereas he has a strategy to influence the stock and effectively force it to go up. That’s a simplification, but it becomes clear that what he’s teasing by “Active shares” is investing in stocks that are facing pressure from activist investors.

Activist investors are often hedge funds, though certainly plenty of institutional-size investors and mutual funds have activist tendencies, too — these are the folks who you often hear about as investing celebrities, like Bill Ackman or Carl Icahn, the investors who see an opportunity for a company to do something that makes their shares more valuable (sell assets, pay a dividend, buy back shares, merge, etc.), and buy up enough stock to get the company’s attention, then push management to move in their direction — that sometimes means actual activist proxy battles where a political campaign is run to find the will of the shareholders, but more often just means that the activist presses for a board seat to get more representation, or uses public or private pressure or friendlier “encouragement” to share their expertise and urge the company to do something shareholder-friendly.

There are a lot of newsletters that follow insider buying trends, and try to recommend stocks where patterns of insider buying indicate that the stock is likely to go up (based, in part, on a few academic studies that indicate that concerted C-suite buying — CEO, CFO, etc. — tends to lead to stocks that outperform 6-18 months or so after the buying). But I’m not aware of many newsletters that focus specifically on just following these kinds of activist investors, so this might be an interesting one to watch.

Here’s an example of what Lichtenfeld is teasing to back up his strategy of “active” investing:

“Watching your favorite stock steadily decline is never fun.

“But with ‘Active Shares,’ you don’t have to worry about that problem… Because you could actually have a say in where the share price is headed.

“For example…

“Barron’s recently profiled a group of people that bought ‘Active Shares’ in Toreador Resources during 2009.

“These people weren’t happy with their share price of just over $2 so they demanded that the company increase the value of their shares.

“As Barron’s puts it: ‘It took only eight days’ and they ‘got everything they wanted.’

“Their Active Shares in Toreador then went up like a rocket ship from just $2.11 to $7.25.

“If you have the old-fashioned view that making money in stocks means buying and passively hoping they go up… well, this definitely isn’t for you.

“On the other hand, if you want control over where your stocks are headed, then ‘Active Shares’ might be just what you’ve been waiting for.”

So, manipulative language aside, what could go wrong, right? Well, that Barron’s article about Toreador is here if you’re interested — but it’s worth noting that although activists often move the share price up, they don’t often get everything they want and they rarely influence companies quite that quickly.

The basic tool for tracking activist shareholders is the 13D filing, which any shareholder is required to file ten days after they reach the 5% ownership threshold — that’s not to say that you can’t be an activist with less than 5% in some cases, but you don’t have nearly as much leverage if you’re not one of the larger shareholders. Sometimes 13D filings are quite specific, and the law says that investors have to disclose details if they have a specific plan in mind, such as getting a board seat or advocating a merger, but big shareholders can often file a 13G instead, with less detail, if they’re passive investors, and many 13D filings don’t result in any particular “activism” either, you’ll often see reports about 13D filings where the investor “reserves the right” to pursue some activist strategy in the future but discloses no specific plans.

And, as you might expect, Lichtenfeld has one recommendation to tease for us today — after all, what’s a come-on with out a specific idea that helps you imagine the payoff?

Here’s the tease from the ad, about a specific activist investor that he’s tracking:

“For example, according to a recent Barron’s profile, and confirmed by my research, he’s only closed out one loss in his last 22 target stocks.

“And out of those 22 stocks, this brilliant investor has averaged a 41% gain on each.

“In total, that’s a cumulative gain of 902%!

“As Barron’s notes, the S&P has risen a measly 1.4% over the same period.

“Needless to say, when you have a chance to buy Active Shares alongside this guy, you better jump on the opportunity.

“And in this case, he’s targeting a small financial stock trading for around $10. Its market cap is just $210 million.

“But what makes this financial stock exciting?

“In short, it’s a prime takeover target.

“Over the last two years, while most financial companies were scrambling for federal bailouts, this company didn’t take one penny in government money.

“Instead, they were busy eliminating almost all their debt – nearly $1 billion worth.

“With their debt level now at practically zero, this company is poised to see profits rocket out of the gates in the fourth quarter of 2010 – increasing its value on the open market significantly…

“And the Activist investor involved clearly sees this as an opportunity to pounce.

“He’s quickly become the largest shareholder in the company and now plans to ‘maximize shareholder value’ by exploring a sale of the company on the open market.”

So that’s interesting, right? A specific idea that is apparently quite current (the newsletter hasn’t yet started, and he says in the letter that this will be his first recommendation “set to go out in just a few days” (I got the email just today, but I have seen older copies of it going back several days, so it’s possible the recommendation has gone out “officially,” don’t know).

And how about the timing of when these shares will “go active?” He refers to that in kind of mushy ways in the ad, but it seems like he thinks the shares “go active” when they’re picked up by the press and the activism starts to get more media attention. Or maybe he mans that they “go active” when he officially recommends them. In any case, he thinks this “active” moment happens soon:

“And if word that any sale is in the making gets out – which I suspect could happen very soon – shares of this small company could rise very quickly…

“In fact, the last time this Activist was involved in a similar financial stock, (same industry, same size, comparable balance sheet) it ended up going from $18 straight to $35 after the sale.

“It was a quick double for all Active shareholders involved.

“But this time, I believe the profits will be even bigger.

“If you buy when shares go “Active” in the next few days, I’m certain you could have the opportunity to double your money in less than six months.”

I hope you noticed the continuing iffy language, which I expect is endorsed by lawyers: “certain you could have the opportunity” sounds like a promise but promises nothing.

But anyway, that’s plenty of info for us to toss into the gaping maw of the Thinkolator … and out the other end comes our answer: Abington Bancorp (ABBC)

And the activist in question this time? (No, I don’t feel the need to capitalize “Activist” to make it seem more important) That’s a well-known investor (and activist) in financial stocks, Lawrence Seidman. And he’s often pushy enough that he’s sometimes referred to as not just an activist but a “dissident” investor — conjures up sexy images of noble rebels in bandanas, right?

So this is a real bank, they’ve been unprofitable over the last 12 months but they have paid down some debt and seem to have a pretty light debt load for a small bank (though I won’t pretend that I can really understand bank balance sheets). They also pay a dividend and have done so consistently for several years, the quarterly payout has remained steady since 2008 at a nickel a quarter, which at a share price of about $10.50 means a yield of just under 2%. This is a small bank, with assets of a bit over a billion dollars and deposits of around $800 million, in eastern Pennsylvania, so it could certainly be taken over by any number of other banks quite easily.

And yes, Seidman is a major holder — he filed his 13D with the SEC on August 20, apparently wihtin 10 days after he reached the 5% holding limit (he hit 5.05% at the time). Of course, he could have been buying it for ages before that, but that’s when he hit the 5% mark and had to file the 13D, which gets much more specific attention than the quarterly 13F portfolio update filing that institutional money managers file.

Seidman sometimes does get a fair amount of press when he takes large positions in companies and starts to push them, though like many activists he’s probably pretty “active” in talking privately with management for a long time before most other folks or the media hear about it, and perhaps before he has a large enough holding to file a 13D.

You can see his 13D filing here, by the way — his holding is spread across a number of partnerships and funds, but appears to be just over a million shares as of August 20.

As to whether or not this is a situation that has “gone active” per Lichtenfeld’s criteria, I’m not sure — it did get covered in Barron’s, which does a good weekly update on activist investor filings and other interesting 13D developments, the Barron’s update is what Lichtenfeld referred to as the “profile” of this investor, and you can see it here if you like. As with other more recent coverage of this insider position, Barron’s thinks he’ll push for a sale of the company — in part because this is an unusually large position for him that he’s taken on with partners. More recently, TheStreet.com has covered this one too, and quotes Seidman as saying that the bank should be sold.

Of course, whatever the bank might be worth is yet to be determined, but Seidman is apparently already doing pretty well — according to the Barron’s update his average cost was $8.30, by the time the SEC filing was made the shares were over $9.50 … it got a bit of attention in the days following that filing, and by the time Barron’s covered it about a week later the stock was over $10. The stock now trades at about $10.50.

I don’t know what Seidman’s timeframe is, but he has certainly been active over many years with some of his investments — the highest profile holding of his that I hear about of his is Center Bancorp (the perfect ticker for press coverage, CNBC), and he has owned that for about four years, I think, and holds about 20% and sits on the board.

So … there you have it: a small Pennsylvania bank that I know next to nothing about, but Marc Lichtenfeld is “certain you could have the opportunity” to double your investment in this stock, thanks at least in part to the fact that activist investor Lawrence Seidman is pressuring the company to sell themselves.

And no, you specifically (unless you’re plunking down $10 million bucks for a 5% stake, too) won’t be getting a board seat or having this kind of influence on the company, so you aren’t really getting “active” yourself other than the fact that you’re actively following a pushy investor — and yes, his “active shares” are the same as your regular old common shares, it’s just that he holds more of them.

If you’re interested in following a few specific activist investors, you can remind yourself to go search the SEC Edgar database every now and then for their latest 13D filings, or if they’re higher profile you’ll see them in the financial news with some regularity — or you can be more passive and just read the weekly Barron’s column on insider and activist filings, or use a service like Lichtenfeld’s or a more data-focused service like 13DMonitor.com to track filings. Among the many free sites that track insider and institutional findings, I found WhaleWisdom to be pretty simple and useful, though I haven’t looked at it that closely. Just remember, as with all SEC “guru” and insider filings, there’s often some significant time delay that will mean that the person you’re following paid a significantly different price than the stock trades at today.

Sound like the kind of think that gets you excited, or does it fill you with ennui? Something inbetween? Let us know with a comment below.

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4 Comments on "“New ‘Active Shares’ Let You Influence the Price of Your Stocks”"


October 21, 2010 6:43 pm


October 21, 2010 11:15 pm

Travis: Thanks for your thoughtful analysis of this blurb. Unfortunate
the entire piece because an ad from GROUPON is covering a large section of your textly, I cannot read
and I can't get it off. Can you?

October 22, 2010 7:28 pm

Download Readability.com. It gets rid of all ads and lives in your tool bar.

October 23, 2010 7:29 pm

thank you, travis. i made money from your free service, so i guilted myself into buying an irregular subscription.
i truly enjoy your writing.