“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.

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“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