MorningWord 11/11/13: While I have no experience as an Activist investor, I suspect that its is very much an art rather than a science. Some of the most successful activists are nothing short of very rich big mouths, while others are thoughtful and patient considering each brushstroke that they will apply to such investments. It appears the loudest guys in the room of late have been stealing most of the headlines, which in a bull market has equated to healthy profits.
And then there is Dan Loeb, who runs hedge fund Third Point. Over the last decade, Loeb became infamous for his aggressive literary tactics with the managements of his corporate targets (see Vanity Fair’s compilation of the 10 most prolific here, but be sure to read their entire hatchet job on the guy, it is a classic here). I once worked for a guy who got into what you would call a pissing match with Loeb over Bloomberg messaging that went on for hours, so I have witnessed his tenacity nearly first hand (wouldn’t wish that wrath on an enemy), and if I remember correctly the disagreement had little to do with stocks or corporate raiding and might have had all to do with their opinions of a piece of overpriced canvas with a bunch of paint splatters on it.
By all accounts, Loeb has chilled out with his aggressive tactics, but this has not meant that he has gotten soft in his old age, or less profitable. Use his investment in YHOO for example, he got long in size in 2011 when few investors saw the possibility of a meaningful turnaround for its core business. He became the largest shareholder in the company with a 60 million share stake with an average below $14. He made his case for the shares, started a proxy contest, got 3 board seats, pushed for a partial sale of Alibaba stake to fund huge share buybacks, helped get rid of a CEO that lied on his resume, and then he sat and watched as the stock rose on what felt like every day of CEO Marissa Mayer’s young tenure in 2012 and 2013. Earlier this summer, with more than a double on his hands, Loeb sold two thirds of his stake back to the company at $29.11 at multi-year highs. Nothing short of a work of art!
Which brings me to his latest “Pick to Click” so to speak, Sotheby’s (BID) where he has recently amassed a 9.29% position in the company where he is now the largest shareholder. And its not just Loeb, activist investor Mercato Capital has a 6.7% stake and is the third largest shareholder and they are pushing for sales of BID’s lucrative real estate in London and New York and to better tap the value of their lending business (here from WSJ). Make no mistake, these guys have forgotten more about investing than I may ever know, but the BID situation does not seem to offer the same risk reward for those of you playing at home looking to ride some hot shot investor’s coattails.
BID is up 52% year to date and just a few % from multi year highs. For those of you bubble watchers, this is the exact sort of situation that bears would point to when they talk of irrational exuberance when you consider they just completed their second most successful impressionist sale in history selling $16 million Monets. While the activists are looking to unlock value and use the proceeds to buyback a third of the stock, I am hard pressed to see in the near term how this could be a decent entry point for new shareholders or for that of the company to retire shares, regardless of the near term positive implications for earnings. The existence of activists obviously places a “BID” under the shares, but just as we got towards the end of the LBO boom in 2007, deals started going sour and fast, and some by well known deal artists in the space.
BID reports Q3 earnings tonight after the bell, and the options market is implying about a 5.5% move, vs the 4 qtr avg of about 3.3%. Implied vol is bid as options traders are looking for any acknowledgment by the company of activists demands. For those looking to play long, it could make sense to sell short dated calls that are “BID” up for earnings and set up to own longer dated calls as it may take some time for activists to effect change, I prefer defined risk in these situations.