Shareholder activism, which is investors’ use of their shares’ voting power to effect corporate change, is on the rise. If you’re patient, you can benefit from shareholder involvement, too.
Shareholder activism is expected to increase through at least 2014, according to a November 2012 report by Schulte, Roth & Zabel, which is a financial law firm. However, it typically takes at least 3 years for shareholder activists to produce changes that make the companies more profitable, according to a May 2013 report in Journal of Applied Corporate Finance. The energy, technology, financial services, industrial and chemical sectors are expected to see more fights with investors, the Schulte, Roth & Zabel report says.
Damien Park, who is a managing partner at Hedge Fund Solutions, which monitors shareholder activism, says you should look for companies that have increasing cash balances. Shareholder activists often see that as an opportunity to press the company to use the cash for growth or return it to shareholders in the form of dividends or stock buybacks. Further, you should look for companies that are merger targets. When shareholder activists see that a company can fetch a high price, the activists start to push, Park says.
For example, Wet Seal (Nasdaq: WTSL; Price: $4.79), which is a clothing retailer, held more than $148 million in cash (nearly 50 percent of the company’s assets) when activist investor Clinton Group started pushing for change in August 2012. After the company bought back shares, implemented cost-cutting and made changes in the management, its shares doubled in value.