13 Stocks Activist Investors Are Buying
Poorly managed companies may not be on everyone's radar, but they're top picks for activist investors looking to boost shareholder value.
Most investors shy away from poorly led companies because they can really hinder share price appreciation. Activist investors are an exception. They acquire big equity stakes with the goal of forcing changes that may boost the stock price.
When hunting companies in need of makeovers, activist investors look at issues like vague business plans, underutilized assets and excessive pay – all of which detract from shareholder value. They then push to implement changes that can include a business sale, slashing costs or a dividend hike.
In some cases, CEOs ignore the activist investing advice at their own peril. Shareholder activists who are impatient with the company's progress will sometimes threaten "proxy fights" and seek to oust existing corporate officers and directors.
Sometimes the actions of activist investors pay big rewards for other shareholders. For example, in late 2020, activist firm Third Point Partners persuaded Walt Disney (DIS) to cut its dividend and boost investment in streaming services. Since then, DIS shares have risen nearly 50%.
Here are 12 stocks on the radar of activist investors. Some are newly under siege, others are embroiled in proxy fights and still others are listening to activists and making changes. Not every activist campaign is successful, however, so approach these with the same caution as any other turnaround play.
Data is as of May 3.
- Market value: $20.8 billion
- Dividend yield: 4.1%
First Energy (FE, $38.32) is an electric utility that provides energy to approximately six million customers across Ohio, Pennsylvania and other eastern U.S. states. The company gained the attention of activist investors last year following a federal bribery probe that triggered the firing of several executive officers.
Activist investor Carl Icahn has acquired a sizable stake in First Energy, up to 3% of its outstanding shares according to some reports. And in March, Icahn and First Energy reached a deal for him to have two seats on the utility's board. While he isn't pursuing control of the board due to regulatory constraints unique to the utility sector, Icahn wants to narrow the company's valuation gap relative to its peers.
KeyBanc analyst Sophie Karp thinks Icahn may push for an outright sale of the company, but believes it more likely that some non-core businesses may be exited. She has a Sector Weight rating on FE stock.
While FE shares have gained roughly 25% year-to-date, investors enticed by the company's high dividend should approach with caution. First Energy has a high debt load and a payout ratio that has been steadily rising. Both of these make for a risky dividend.
- Market value: $231.2 billion
- Dividend yield: 2.4%
A leader in computer microprocessors, Intel (INTC, $57.26) is drawing criticism from activist investors because of steady market share losses. Last December, activist hedge fund Third Point began pushing the company to explore strategic alternatives, potentially including separating its chip design and semiconductor fabrication operations and shedding some businesses. Third Point has reportedly acquired a roughly $1 billion stake in Intel.
Famed activist investor and Third Point CEO Dan Loeb complains that Intel has been losing market share in microprocessors to Asian competitors and has been falling behind in the PC and data center markets because of weak efforts in emerging areas like artificial intelligence (AI).
Intel hired Pat Gelsinger as its new CEO in February. Shortly after, he unveiled plans to lead a $20 billion manufacturing expansion intended to restore Intel's position as a major player in semiconductor manufacturing. The company also announced a research collaboration with International Business Machines (IBM) that expands its focus on next-generation technologies.
In addition, Intel launched its latest third-generation processor in April targeting data centers, 5G networks and intelligent infrastructure. The processor also offers embedded AI.
Both Bank of America analyst Vivek Arya and BMO analyst Ambrish Srivastava like the management change at Intel, although both warn a turnaround may take time. Raymond James analyst Chris Caso is more skeptical and downgraded INTC to Underperform in April.
- Market value: $9.7 billion
- Dividend yield: 1.6%
Activist investors began targeting apparel and soft goods retailer Kohl's (KSS, $61.82) in February, complaining that the company's financial performance was only slightly better than the worst retailers and pushing for massive changes to the board. The activist group – which includes Macellum Advisors, Ancora Holdings, Legion Partners Asset Management and 4010 Capital –, own approximately 9.3% of KSS shares.
Kohl's sales fell 20% last year and the company provided weaker-than-expected 2021 guidance.
The company is fighting back and says its activist investors lack retail experience. A proxy fight began that targeted five of the 12 members of Kohl's board and a settlement was reached in April giving the activist groups two seats.
The activists want Kohl's to improve merchandising, update its marketing and rewards plan and increase inventory turns. They also want revisions to executive compensation and the company's real estate strategy.
KSS shares are up over 50% year-to-date versus 12% growth for the S&P 500, which the activist investors attribute to expectations around the pandemic recovery rather than the retailer's new strategy. KSS has ratings of Hold or Underperform from 14 of the 21 analysts following it that are being tracked by Yahoo Finance.
- Market value: $249.0 billion
- Dividend yield: 5.9%
Energy giant Exxon Mobil (XOM, $58.82) has been in the crosshairs of activist investors recently because of its singular focus on fossil fuels, which they blame for the company's 2020 net loss and $19 billion in writedowns.
More than 135 activist investors representing $2 trillion in assets joined forces in late 2020 and early 2021 to push Exxon Mobil to make changes to its board and increase its focus on clean energy. Engine No. 1, a San Francisco-based investment firm backed by the California State Teachers Retirement Fund, led the effort and wanted four board seats, a preserved dividend, smarter capital allocation and increased investment in renewable energy.
Exxon rejected these proposals, arguing that the activist investor's strategy would put future cash flows and the dividend at risk. The company also rejected the idea of separating the chairman and CEO roles.
As a concession to activists, the company added Jeff Ubben, the founder of clean energy investment firm Inclusive Capital Partners, and former Comcast (CMCSA) CEO Michael Angelakis to its board in March.
Rising oil prices have led to positive analyst ratings for XOM. In mid-April, Raymond James analyst James Jenkins boosted his rating to Market Perform. And earlier this week, Goldman Sachs analyst Neil Mehta reiterated a Buy rating on XOM, citing potential upside from cost reductions and the company's chemicals business.
- Market value: $11.2 billion
- Dividend yield: N/A
Bausch Health (BHC, $31.42), formerly known as Valeant Pharmaceuticals, develops and manufactures branded and generic drugs, medical devices and over-the-counter products.
In addition to being one of the top stock picks of billionaires, Bausch has attracted the attention of several activist investors, who believe the company is undervalued and criticize its limited progress growing its business.
Bausch had already announced plans to spin off its eyecare business, Bausch + Lomb, which contributes over 40% of sales, but activist investor Glenview Capital complains the company is moving too slowly.
Legendary investor Carl Icahn joined the fray and succeeded in getting two new directors on the board in February after unveiling a 7.8% stake in BHC. The shares hit a nearly five-year high in March on expectations Icahn can get a better value for Bausch assets.
Bausch has also made progress deleveraging its balance sheet. The company recently sold its equity stake in Egypt's Amoun Pharmaceutical for $740 million and plans to cut another $100 million from debt using cash from operations.
- Market value: $46.5 billion
- Dividend yield: 3.3%
Danone (DANOY, $14.40) is a global food and beverage manufacturer of yogurts, milk products, bottled water, coffee creamers, ice creams and powdered protein drinks.
After incurring the wrath of activist investors by reporting losses during the pandemic, Danone in November announced several initiatives aimed at trimming costs by $1.2 billion and restoring profitability, including cutting 2,000 jobs.
In a move to appease activist investors Artisan Partners and Bluebell Capital Partners, Danone agreed to sell its stake in a Chinese dairy firm Mengniu, and plans to use the $1 billion sale proceeds for share repurchases.
The company also announced in mid-March that Chairman and CEO Emmanuel Faber was stepping down, and it has begun the search for a new CEO.
DANOY shares have risen roughly 10% year-to-date, trailing the nearly 12% rise in the S&P 500.
While the sale of its stake in the Chinese unit is seen as a good step to increase the stock's multiple, a turnaround with legs will likely depend on hiring an aggressive CEO that is strongly focused on shareholder value. Additionally, with DANOY trading over the counter, it's one of the more riskier stocks to trade on this activist investing list.
Elanco Animal Health
- Market value: $15.0 billion
- Dividend yield: N/A
Elanco Animal Health (ELAN, $31.80) develops and sells vaccines, wormers and flea protection products for pets and farm animals. The company was spun off from Eli Lilly (LLY) in 2018 and completed the purchase of Bayer AG's (BAYRY) animal health business in 2020.
Activist investor Sachem Head Capital Management invested $1.2 billion in the company in 2020 and was given three board seats. The Wall Street Journal, citing people familiar with the matter, reported in early March that another activist investor, Starboard Value, had taken a stake in ELAN in February and aimed for three board seats. However, Reuters, also citing sources familiar with the matter, reported later in the month that Starboard withdrew its nominations in late March for undisclosed reasons.
However, neither Elanco nor Starboard confirmed either report.
Activists have criticized ELAN – a top contrarian stock pick earlier this year – for supply chain issues and weak margins. The company responded with a plan to improve margins by trimming $100 million from expenses.
Despite some negative headlines about the company's Seresto flea collar product, Citi analyst Navann Ty is sticking with his Buy rating on the activist investing shares, anticipating a low probability of a product recall.
Morgan Stanley analyst David Risinger has an Overweight rating on ELAN shares, citing three new product launches this year and accelerated post-pandemic growth.
- Market value: $2.6 billion
- Dividend yield: 1.0%
Forward Air (FWRD, $94.62) provides expedited freight delivery services and also owns intermodal transportation businesses.
Activist investor Ancora Holdings recently criticized the company for its subpar performance relative to industry peers. Ancora blames weak results on acquisitions that have increased diversification, while it believes Forward Air should have instead been strengthening its foothold in the expedited freight business.
Ancora holds a 6.3% stake in FWRD and initiated a proxy fight to obtain four board seats. Its demands included revisions to capital spending and the sale of non-core assets.
In a nod to activist investor demands, Forward Air sold its pool supplies business in February for $20 million, bought Proficient Transportation for $15 million to expand its intermodal freight business and invested in new terminal infrastructure.
Additionally, Forward Air capitulated to all demands in March by adopting five new board seats – two held by Ancora nominees and three endorsed by the activist investing group. The nominees will stand for election in May.
Earlier this year, the company moved to strengthen its balance sheet by increasing its prices by 6%. And in its first-quarter earnings report released in late April, Forward Air reported an 18.5% year-over-year rise in operating revenue and net income per diluted share that was up 46.3% from the year prior.
- Market value: $1.9 billion
- Dividend yield: N/A
Delek US (DK, $25.40) owns four oil refineries in the Southwestern U.S. representing throughput capacity of 302,000 barrels per day. The company also operates a 1,570-mile pipeline system, three biodiesel facilities, 10 terminals and 253 retail stores across the same region.
CVR Energy (CVI) – a Texas-based energy company majority owned by activist investor Carl Icahn – acquired 15% of DK shares in 2020, and filed a lawsuit demanding full disclosure of CEO compensation, some of which was not disclosed in past proxies.
According to CVR, Delek's CEO was paid an "eye-popping" $81 million over eight years, which came from a combined $53 million in compensation and a 5% stake in DK subsidiary Delek Logistics Partners (DKL).
Icahn's CVR Energy is seeking three board seats and pushing for changes that put free cash flow ahead of growth. He wants Delek to sell its retail stores and convert some refineries to biodiesel terminals.
DK shares are up approximately 58% year-to-date mainly due to rising energy prices and an Environmental Protection Agency (EPA) decision to extend the deadline for new biodiesel blending requirements. Analyst opinions of this refiner are mixed with eight firms tracked by Yahoo Finance rating the stock Buy and six rating DK a Hold.
- Market value: $55.5 billion
- Dividend yield: 0.8%
U.K.-based Prudential (PUK, $43.19) provides life and health insurance to customers in Asia and annuities in the U.S. through its Jackson Financial subsidiary. The company is known for its market leadership in Japan, steady growth, solid balance sheet and well-supported dividend.
Activist investor Third Point thinks growth for Prudential could be stronger and disclosed a $2 billion, or 5%, stake in PUK last year – recommending that the company separate its faster-growing Asian unit from its U.S. business.
In January, Prudential's new more Asia-focused Group CEO Mike Wells announced plans to spin off the Jackson Financial operation, while retaining a 19.9% stake in the offshoot that will be sold over time. Analysts at J.P. Morgan Securities value the Jackson Financial business at $10 billion, minus the cost and debt share.
While some investors seem disappointed with the news, Third Point thinks a greater focus on Asia will enhance this insurer's value. Last year, Prudential generated a 13% adjusted operating profit growth from its Asian business versus an overall company adjusted profit that rose only 4%.
PUK shares are rated Buy by the two covering analysts tracked by Yahoo Finance. In March, HSBC analyst Kailesh Mistry upgraded the stock to Buy.
- Market value: $4.5 billion
- Dividend yield: N/A
ACI Worldwide (ACIW, $38.07) sells software that facilitates electronic payments to banks, merchants and other customers. North of 6,000 organizations, including more than 1,000 of the world's largest banks, use ACIW software to process $14 trillion in payments each day.
Activist investor Starboard Value began buying shares of ACIW last year, and has now acquired a 9% stake. In reaction to weak guidance from ACIW that suggested no organic growth until 2023, Starboard has pushed the company to explore value-enhancing options that include a potential sale of the business.
The company reached an agreement with Starboard in February to add two new independent directors, increasing the total board members to 12.
Starboard's pressure has helped boost ACIW's share price 54% since last September, and the activist investing stock continues to be well-liked, rated Buy or Strong Buy by four of the six covering analysts tracked by Yahoo Finance.
- Market value: $4.6 billion
- Dividend yield: 4.1%
Copy machine maker Xerox (XRX, $24.10) had hoped to boost sales by expanding into digital document management, but disappointed investors with a big miss on 2020 profits. Credit Suisse analyst Matthew Cabral complained of cost reductions and free cash flow improvements taking too long to materialize and downgraded XRX shares to Neutral.
Xerox rolled out a new plan in February to reorganize the company into three businesses – software, financing and innovation, each with its own management team, which it said would improve focus, flexibility and visibility for each business.
Activist investor Carl Icahn is upping the ante on XRX stock. After criticizing HP Inc. (HPQ) for rejecting Xerox's takeover offer in late 2019 – which morphed into a hostile bid that XRX eventually walked away from in March 2020 – he recently increased his XRX position to nearly 28 million shares, a roughly 17% stake.
Some see Xerox as a high-yield turnaround play, but investors should proceed with caution due to the company's excessive leverage, weak interest coverage and dividend payout that exceeds earnings. In fact, Kiplinger highlighted XRX as one of 15 dividend stocks to avoid last October.
- Market value: $2.4 billion
- Dividend yield: 0.4%
Defense and transportation company Cubic (CUB, $74.80) makes technologies that help subway systems collect fares and the military manage weapon systems.
Activist hedge fund Elliott Management unveiled a 15% CUB stake last September and indicated interest in buying the company outright. Cubic initially rejected the joint buyout offer from the activist investor and private-equity firm Veritas Capital, claiming its standalone growth prospects were excellent. CUB also put in place a poison pill to prevent Elliott Management from taking control.
Cubic's action created a bidding war between Elliott Management and Singapore firm ST Engineering, and the former increased its offer to $75 per share, a 66% premium to Cubic's pre-bidding war price near $45 per share.
Cubic's board has accepted this offer from Elliott Management and Veritas Capital, and CUB shareholders approved the takeover bid on April 27. The proposed merger is now subject to regulatory approval.