I haven’t ever written about Insider Monkey before, but I’ve used their website and admired their editorial content for a while — they started as a site that tracks big insiders, particularly hedge funds and other high profile investors, using their public filings and news sources, and they’ve evolved to offer an investment strategy (and accompanying paid newsletter) that tries to piggyback on the most successful activists and hedge fund managers (and the most lucrative segments of the market).
They offer other premium-priced research as well, including analysis of individual funds and their portfolios as reported in their 13-F filings, and commentary on ways to emulate the trading and strategies of admired hedge funds in your own portfolio (meaning, without paying hedge fund fees), but the product they seem most proud of is their Small Cap Hedge Fund Strategy, which they sell as part of their $350 Hedge Fund Alpha newsletter — essentially, that’s a strategy designed to follow the small companies that are targeted by multiple hedge funds, and over a couple of years they’ve found it beats the market.
But last week I also got a teaser pitch from them that caught my eye, and a few readers have also forwarded the same ad, so I thought we’d solve it for you and get you started on checking it out if you’re curious. They call this the “#1 Top-Ranked Activist Stock in the World”, and here’s the hintification:
“Our stock picking strategy identifies the best stock picks of the best hedge fund managers like David Tepper, Warren Buffett, George Soros, David Einhorn, and Steve Cohen.
“We will now share one of the strategies we use to identify the “best stock picks”
“About seven years ago, a study was done by renowned professors from Columbia, Duke, and other academic institutions and it was published in The Journal of Finance, one of the most prestigious academic publications in the world.
“The study showed that, on average, activist funds outperformed the market by an average of 20.6 percentage points per year.
“In fact, the top 25% of activist hedge funds beat the market by 28.3 percentage points annually.”
In many ways, though hedge fund activists are often derided by long-term investors and company management (and even by Warren Buffett, who was quite an “activist” himself in his early days), we’re really in a “golden age” of activism — folks like Bill Ackman and Carl Icahn have made activism, and its financial rewards, into headline news (perhaps partly because of their billionaire boy spats), and beyond the hugely successful billionaire activist investors there are hundreds of little baby hedge funds who are trying to reap the same rewards by investing in companies, pushing them to do something (spin off a division, raise the dividend or buyback, change the CEO, cut spending that they see as wasteful, etc.), and then reaping the rewards as the stock price rises.
And yes, some activists are pretty clearly better at it than others — whether because they have a reputation that companies respect, or because they have huge amounts of capital to deploy, or have genuinely good ideas in partnering with management, or whatever other reason. All of them also make mistakes, and fail sometimes, but there’s a reason why so many of the well-known investors we see on CNBC or in the Wall Street Journal are activists: they generally move stock prices. Sometimes that movement comes simply from the fact that an activist is involved, which gives the potential for something big or different to happen in a situation that investors might have perceived as boring before, and in those cases it can be tough for investors to profit alongside the hedge funds because they buy at lower prices before announcing their intent, and the stock goes up pretty quickly once that intent is publicly known. But sometimes the stock price gains come over a longer period of time as news about what the activist is trying to do continues to trickle out, or bidding wars begin if a company might be put up for sale… and sometimes the gains are simply hard-won or come over time as actual improvements at the company are made.
Which is where Insider Monkey comes in, they say:
“… if you didn’t know anything about investing and all you did was mimic the campaigns alongside the funds, you still would have beat the market by a very large margin.
“Better yet, if you identified the best activist hedge funds and their most promising ideas by analyzing historical patterns, you could have beaten the market by anywhere from 28.3 to 153.2 percentage points annually!
“That’s what Insider Monkey’s new activist investor newsletter is all about.”
None of this activism has much of a quantifiable track record, frankly (I think the Journal of Finance article they’re talking about is this one from August 2008, and their data set is only seven years and seemed to me to indicate a decline in the “kick” from activism over that time), and every case is individual — so while I’d agree that following the best activist shareholders is probably going to work out, it almost certainly won’t work out with every pick, you’d have to trade a lot of them to give the strategy’s “edge”, whatever it might be, enough opportunity to work, and you’d probably have to be nimble and attentive enough to get in close to when the activists do, or at similar prices, for the best results.
So from my perspective, it’s an admirable goal and a worthwhile thing to study and it may be worth following these activist “whales” in your trading to some extent… but the data about past results isn’t that compelling because activists are all quite different, there’s no one strategy that works above others for activists, and no one seems to have really tracked the results of activist campaigns with a data set of compelling size or scope (understandably so — I assume it was a huge challenge just to gather the data for their study of 2001-2006 in that Journal of Finance paper)
But I’m always interested to read about stocks that are current or possible activist targets, so let’s see what the Insider Monkey folks are teasing in their ad campaign:
“At Insider Monkey, our proprietary software recently flagged a transaction by one of the best activist hedge fund managers.
“This hedge fund is well-known in the tight circles on Wall Street, but it’s still considered under the radar.
“The manager started this fund and what sets it apart is that those running it are known as ‘the nice guys on Wall St.'”
Oooh, OK — “under the radar” sounds good. Who is this investor?
“The fund manager has decades of experience serving in the M&A department at Morgan Stanley before making his career at one of the big private equity firms that were famous for their big leveraged buyouts (LBO’s) in the late 80’s. His firm was making so much money, it was profiled in the book ‘The Predator’s Ball.’Are you getting our free Daily Update
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“The new fund he started likes to operate a little under the radar. It doesn’t quite have the name recognition that Carl Icahn’s Icahn Capital or Nelson Peltz’s Trian Partners has, but this only serves as an advantage to you.
“What sets it apart from other funds is that it only invests in companies that will work with it, where it respects the management, who will listen to its suggestions and figure out what is best for shareholders.
“Basically, management at the targeted companies like him and don’t try to fight him!”
Ah, OK — this is perhaps less of a “name-recognition” guy than Ackman or Cohen or Loeb or Icahn, at least when it comes to retail investors, but he’s certainly a big and well-known activist investor. This is Clifton Robbins, who runs the Blue Harbour Group funds, and he’s certainly gotten his share of press — he was profiled as a “lover not a fighter” in the Wall Street Journal a couple years ago, he pitches his public positions on CNBC just like everyone else, and he is a member of the (large) camp of activists who generally prefer to avoid being “confrontational.”
Obviously, it’s easier to get management to change things than to force management out or replace the board — sometimes boards and management listen, sometimes they don’t and the adversarial stuff comes in, but Robbins says that his firm goes through a long process of engaging management before they buy stock in a company, he thinks there’s a place for aggressive activism but doesn’t want to do it himself. I think I’ve only written about Clifton Robbins once, back when he gave a presentation on Chico’s to the Value Investing Congress a couple years ago (the stock has been flat in the 20 months or so since then, for whatever that’s worth — he thought it was worth $22-28 and it’s never gotten close to that, Blue Harbour still owns more than 7% of Chico’s).
So which Blue Harbour stock is Insider Monkey talking about? Clues:
“We analyzed historical patterns and identified that one of the most successful activist campaign patterns is one where several activists target a company that has several lines of business.