“Double Your Money on this Activist Stock” (Marc Lichtenfeld)

By Travis Johnson, Stock Gumshoe, March 7, 2011

Last year Marc Lichtenfeld started promoting a new service in which he promised to identify “active shares” that effectively let you choose your own price — and although he had plenty of hype in that letter that sounded utterly foolish, as usual, he was at least partly right about the stock’s performance (he got the direction right, but, so far at least, was a bit optimistic on the amplitude of the stock’s move). So now that a new teaser has come in for his “Active Shares” (yes, he’s still calling them that) over the weekend, I thought I’d see if I could sniff out a name for you.

And yes, no newsletter editor worth his keyboard will let even a marginally successful pick go by without calling attention to it. In this new ad Lichtenfeld takes credit for being right about one of his first recommendations for this Activist Trader letter — that was Abington Bancorp (ABBC), which was being targeted by Laurence Seidman, a well known activist investor in his niche.

Lichtenfeld was looking for at least a double in six months as the stock would be taken over — and indeed, the stock did get a buyout offer at $12.88 back in January. It was around $10.50 when he teased it and I wrote about that teaser, so that’s a gain of about 20% — not a double, as you’ll notice, but at least it did well. Unfortunately, for comparison sake, so did everything else … you would have probably done almost exactly as well in Abington as you did by holding shares in the S&P 500 index over those last six months or so … maybe a little better if Lichtenfeld managed to get in at $10, which is probably lower than he could have possibly gotten his subscribers in, though I don’t know the exact timing of his newsletter launch back in October.

He did, by the way, also toss in a P.S. in this new ad letter — all about how the takeover he predicted for ABBC in six months actually happened in just four, so you have to HURRY UP AND SUBSCRIBE TO HIS NEWSLETTER TODAY IF YOU DON’T WANT TO MISS OUT! Didn’t mention the fact that the prediction of a double was a bit less prescient.

So not a home run, but also not a mistake — worth following up on these “Active Shares” again? Let’s see …

The general pitch behind the Activist Trader newsletter is probably familiar to you — basically, Lichtenfeld tells us that he’s going to keep an eye on the most successful activist investors, use his contacts and super-duper info to parse the hundreds of activists and thousands of stocks they own, and pick the best ones for you to buy as you ride on the coattails of big-money guys like Dan Loeb, Carl Icahn, or Lawrence Seidman.

I suppose you could do most of this yourself if you had the inclination — the SEC filing that is the calling card of the activist investor is the 13D filing, and it tends to make some news when big activists file 13Ds, especially with the relatively new “modern” and more aggressive form of 13D gamesmanship with target companies pioneered by Robert Chapman (who also gets a few paragraphs in Licthenfeld’s long teaser letter). Some activists are quiet about pushing for change, but many of them try to get as much attention as they can because that helps to pressure management to make the changes they’re advocating (or, more cynically, it at least tends to drive up the share price when a well-known activist gets grouchy and pushes for a company to sell itself).

So what Lichtenfeld is selling is not just the idea that he can find the activists that you can’t, it’s that he knows better which activists are the best ones to follow, and which stocks they’re targeting are the best investments. I imagine it’s far too early in the life of his newsletter to be able to pass judgment on that, but today we’ll at least get a second example of a stock he’s teasing as an activist target.

And yes, again he’s saying that he thinks we’ll double our money … here’s an excerpt with the clues that he provides:

Double Your Money on This Activist Stock

“The situation I’m talking about involves an Activist group that I consider to be some of the best at locating an opportunity and pouncing on it.

“Their success rates are other worldly.

“For example, this Activist group recently got involved with a famous software company in March of last year. They announced their plans to make a move on March 2nd. And just one day later, on news the company might be sold, the stock jumped 28%!

“And before that, this group of Activists had an even better success. They went after a small I.T. company trading for $3.86. This time a sale was arranged at $7,10 for an 84% gain! …

“In this case, they’re targeting a small software company that specializes in cloud computing – the next big technology industry….

“This company just recently developed an entirely new software system that changes everything about the way we use computers.

“It’s created a way to minimize the hardware needed to run a computer (that means less cost) while greatly increasing the computer’s productivity.

“For example, their new cloud computing technology increases network capacity by 1,000X. And it can make your applications run 300X faster….

“That’s where the Activist group I’m talking about comes into play. They have gotten involved immediately to try and arrange a sale.

“Why am I so sure it will happen?

“Because this group of Activists already has a history of arranging sales of small tech firms.

“In fact, over the past four years they’ve actually arranged the sale of two smaller companies that are now part of the company I’m talking about. Each time, investors received a big payday.

“And now this group of Activists is going for the big fish.

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

“In fact, based on the track record of this Activist group, we should expect to see at least a quick double over the next six months.

“And after that the profits might go much higher. I foresee potential profits of 306% to 838% over the long haul.”

I don’t know why he thinks the stock will double as news of a takeover comes, but then somehow go up even faster after that — unless, I suppose, the buyout is paid for by company shares of the acquirer, and the acquiring company will go on to have great performance. How he can predict that is beyond me — and of course, we also don’t know what “the long haul” is, but if they get bought out by (for example) IBM do you really think IBM will go up another 800%? That would have to be a very long haul, indeed.

But anyway — you’re here for answers, right? Not more of my blather? Well then, I can tell you that this stock is almost certainly …

Blue Coat Systems (BCSI)

I’ll run down the steps this time, so you can see into the workings of the Mighty, Mighty Thinkolator (yes, it’s back from the shop — thanks for your cards and well wishes!) …

We start with throwing in some of those historical clues, and the answer is spit out quickly — the software stock that got activist attention on March 2 last year was one you’ve probably heard of, Novell (NOVL), and they did indeed get a one-day spike on that news. After that, it’s pretty much been radio silence as takeover rumors swirled and finally a deal was done a few months ago, but it still hasn’t closed. And the deal will close, assuming it happens, at a price lower than the day after the news spiked the share price on March 3. So again, if you were in before the news came out, your performance over the last year or so in those shares would have closely matched the performance of the broader market, up 20% or so … if you bought after the news, your money has been sitting there idly, doing nothing for a year.

So that’s clue one. Let’s toss in clue two … that goes back further in time, and is the small I.T. firm whose shares went from $3.86 to $7.10 on a takeover. Thinkolator sez that one was Packeteer, in a deal that did actually close and is done, with indeed a solid market-beating profit.

So what do those two stocks have in common? An activist firm called Elliott Associates, which offered to buy Packeteer and helped to get the juices flowing for their strategic takeover by, you guessed it, Blue Coat Systems. And Elliott Associates and some of their colleagues and funds recently filed a 13D for Blue Coat Systems. The 13D is the form you have to file within ten days after acquiring 5% of a company’s stock, providing you’re not a passive investor that doesn’t intend to make demands or press for change (if you’re someone more passive, like an insurance company that just happens to hold a lot of the stock, for example, you can often file the far-less timely 13G, so passive investors can sometimes keep things under wraps for months — though you have to file the 13G quickly, too, if you get over 10%).

You can see the 13D filed by Elliott Associates here if you’re curious. Yes, it’s boring. It basically just spells out exactly how much voting power they have. Combining the various funds and divisions of Elliott, it’s about 9% as of this filing (which came out on December 16).

And as usual, when the 13D was filed it did garner at least a little bit of attention — the volume jumped dramatically and the stock went up about 10% from the close on December 15 to the close on December 17. The stock is now, at about $27, slightly below where it was before the 13D was filed — largely because they issued sober guidance and failed to beat the quarterly number in their last earnings announcement a little over two weeks ago.

In case you’re wondering, yes, the clues about the actual company match as well — Blue Coat puts the 1000X increased network capacity and the 300X faster applications info front and center on their home page, so no surprises there.

Can you, as the headline in the ad tells us, “increase the price of your stock with the click of a button?” Well, on that you’ll have to make your own call — I don’t know what Lichtenfeld’s specific buy recommendation might be on BCSI, but since the price is now below the price it held when the 13D filing that must have caught his attention was announced, I presume that he likes the stock just fine here.

He’s not alone, to be sure — BCSI is in a bit of a turnaround, with part of the reason for investor disappointment being that the turnaround is taking longer than hoped. And as a “turnaround” stock it naturally looks a bit discounted when compared to some of it’s web security and network systems peers who are also exposed to what we’re continuously told is the “cloud computing” money avalanche. It’s not a dirt-cheap stock, but with a trailing PE of 21 and a forward PE of about 17, it’s certainly far, far less expensive than most of the stocks that you’ll see touted as having a cloud computing connection, and they are solidly profitable and have a fine balance sheet (a couple hundred million in net cash), so there’s certainly something to like if you think the company will get back on track with revenue growth in the future.

Blue Coat Systems not a tiny company, with a market cap just over a billion dollars, but it is certainly small enough to be acquired by any number of strategic buyers if they should so desire — there are easily dozens of larger tech companies who have more than a billion dollars in cash just sitting in their bank accounts, and the sector, broadly speaking, is almost always a ripe field for consolidation and all sorts of merger and acquisitions activity.

They are best known for secure Wide Area Network (WAN) solutions, but this is how they describe their offerings:

“Blue Coat Application Delivery Network Infrastructure solutions are designed to help you contain network and bandwidth costs, enhance business productivity and mitigate exposure to evolving web threats, providing you with the flexibility to quickly align network investments with changing business requirements, speed decision making and ensure proactive layers of defense to fuel a sustainable competitive advantage.”

If you’d like to hear from other investors who see something compelling in Blue Coat, there was a good analysis published at SeekingAlpha a couple weeks ago that also speculated on the M&A potential, and there was a quick look from a Motley Fool writer who also saw opportunity in the post-earnings share price drop.

So what do you think? Will Lichtenfeld be right that the newly(ish) increased position by Elliott Associates means they’ll push the Blue Coat board, and that the BCSI share price will double as a result? Or do you think the company is just a reasonably priced cloud computing play for other reasons? Too expensive? Too early to tell whether their turnaround will work? Let us know your thoughts with a comment below.

And if you’ve experienced Lichtenfeld’s Activist Trader beyond these two picks we’ve sleuthed out for you at Stock Gumshoe, we’d like to know about your experience — please click here to review The Activist Trader for your fellow investors. Thanks!



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March 7, 2011 1:21 pm

"Two picks we've sleuthed out?" Of course we see BCSI, but is the other ABBC, already bought out, or is it Packeteer? Of course, NOVL is mentioned — coming back from the dead!
so it is BCSI and?
If this newsletter picks any other stocks, let us know, so we can avoid them! BCSI is down 3% with volume increasing 11%, as we type. It just got cheaper, folks!

March 7, 2011 4:17 pm

BCSI and AMAG are the only two stocks listed as a buy in his letter. All others are a hold

Curious girl