What are Activist Investors? Learn More About Activist Investing
Those individuals interested in investing have likely heard a few terms they don’t quite understand yet - this is all part of the ongoing learning process which is inevitable in the finance industry.
The terms ‘activist investor’ and ‘activist investing’ are appearing increasingly in financial news, suggesting it may be a growing trend. But what is an activist investor? What is activist investing?
Let’s look into this emerging sub-topic in more detail to learn more about activist investing and how it fits into the complex structure of the finance industry.
Table of Contents
What Is Activist Investing?
Activist investing is the act of buying a large amount of stock in a company to pressure the company into changing any or all of its various business practices. Activist investing typically (but not always) involves a specialized hedge fund which is created by a particular activist investor.
Activist investing typically involves the purchase of a significant stake, albeit a minority one.
With their minority stake, activist investors can utilise traditional or social media to pressure a company into enacting its proposed changes. Compared to private equity, where they would hold majority shares, this style of activist investing allows for an open and democratic dialogue which challenges how true a company is to the values they promote.
It is interestingly a topic which technically can have a lot of relevance within social impacting investing and ESG (Environmental, Social, Governance) practices, as the ultimate goal is more or less to improve business practices for a variety of reasons.
What Defines an Activist Investor? What’s the Primary Goal?
Since activist investing refers to somebody buying a sizeable (but not majority) amount of stock to pressure a company into major or minor changes, one would define an activist investor as one and the same.
An activist investor can be anything from a hedge fund to a particularly wealthy private investor; what defines them are their actions, not their personhood.
The goals of activist investors may vary.
Some investors, such as larger equity firms or billionaire moguls, may invest in a company to raise its stock price and gain a higher profit when they decide to sell their shares.
Other activist investors may have goals that range from wanting to alter or remove a company’s existing management to simply wanting to provide advice for their management.
Generally speaking, an activist investor could be considered a more ethical type of investor - but of course, this is not always the case.
If you'd like to learn more about the markets, feel free to join one of our free webinars by clicking the link below:
What Do Activist Investors Look For?
Activist investors, as any investors, need to examine and choose carefully the companies they choose to buy into.
While there are no set guidelines that activist investors follow at this point in time, there are some signs that can indicate interest from an activist investor.
The traits that activist investors seek out are not something you will exclusively see via a stock trading app; you must do some research to notice these signs.
Let’s take a closer look at the business traits which can draw in activist investors.
High Cash Balance, Low Stock Price
A company with a large cash base but a stock price lower than its competitors or other companies in the same industry are a prime target for activist investors.
In these companies, an activist investor sees that the company makes money but does not incentivize shareholders to invest.
As such, an activist investor may pressure the company into changing its payout policy for stockholders.
This change can come in the form of a stock buyback program or increasing the dividend payments of each stockholder.
Strong Brands With Poor Marketing
A strong brand with poor marketing is a prime target for larger activist investors, such as equity firms or billionaire moguls.
The process to fix issues with poor marketing is more complex than simply forcing the company to alter its payout policy.
In cases of poor marketing and a lack of brand recognition, an activist investor might pressure the company into entirely altering its marketing strategies or replacing its management.
A Stable Cash Flow With Low Equity Returns
Any business would prefer a rising cash flow, but in cases where such an income is unlikely, business owners may be satisfied with a stable cash flow.
However, this steady flow is a beacon for activist investors, especially if the company has a low return on its equity.
In this situation, an activist investor may advocate for cutting costs and pressure the company to increase its efficiency.
Overdiversified businesses are a favoured indicator for activist investors.
When one of these investors sees a business that has spread itself too thin via expansion, they see a way to easily up their stock value.
By pressuring the company to sell, spin-off, or even close down extraneous branches that do not fit its main focus, an activist investor can increase a company’s operational efficiency and increase profits.
Do Activist Investors Create Value?
When one reads about activist investors, they may seem like a saving grace for stockholders. However, this is not always the case.
If an activist investor is correct, their methods will increase the stock value of a company and bring in further profits, generating plenty of value for the company that they invested in.
However, it is vital to note that activist investors are still human. An activist investor will not always be correct, and by pressuring a company with their incorrect decisions, they can cause the company to lose money.
Therefore, an activist investor does not inherently create monetary value - however, an activist investor who knows what they are doing certainly can create value, overall, in the long term.
Stocks to Watch for Activist Investing
We have reviewed what activist investors look for in a company before investing in such. Now, let’s look at what stocks activist investors may find interesting at this time of writing.
Before one chooses to invest in any of these companies, remember that nobody can guarantee whether an activist investor’s changes will be positive.
One must always consider their risk management strategy before making any investment decisions.
Vodafone Group Public Limited Company, publicly traded as VOD, is a worldwide communications company based in England that has already seen investment by notorious activist investor Carl Icahn.
In 2022, Vodafone has seen a significant rise in share price that continues to climb, making it potentially an option for investors.
However, a negative side is notable; currently, fewer than 18 hedge funds hold stock in Vodafone. If these funds disagree on a methodology, Vodafone may struggle internally.
You have the option to invest in VOD with Admirals using the Invest.MT5 account when you have a live account.
Toshiba Corporation, publicly traded as TOSYY, is an electronics company based in Japan that operates worldwide.
Toshiba is one of the most notable electronics companies in the world, granting it a significant userbase that ensures a somewhat-stable stock.
On the negative side, Toshiba is currently involved in a stockholder battle.
One activist investor, Effissimo Capital Management, wants to split Toshiba into three different companies. However, Toshiba’s second-largest shareholder, 3D Investment Partners, is formally contesting this decision.
Start trading today with leading trading analysis tools - Click the banner below to access MetaTrader:
Kohl’s Corporation, publicly traded as KSS, is a popular retail store based in and operating out of the United States of America.
On the negative side, Kohl’s has seen something of a downturn; with the company taking a major hit during the COVID-19 pandemic, it has not quite seen a return to form.
However, in 2021, activist investors began to push for rehabilitation of the Kohl’s brand, replacing its board of directors and selling off a significant amount of real estate.
With many corporate changes, the future of the KSS stock should be interesting to observe.
Activist Investing: Conclusion
While an individual reading this article may not be considered a business mogul, a millionaire, or other traits which are commonly associated with the term ‘activist investor’, that does not mean one cannot learn from the investing style, itself.
Perhaps someone who is interested in green investing, ESG investing and otherwise may find the concept of activist investing appealing as well.
For those not registered with Admirals, it is possible to start first with a demo account using virtual funds, where one can then proceed to open a live account. Register for a demo account today by clicking the banner below:
INFORMATION ABOUT ANALYTICAL MATERIALS:
The given data provides additional information regarding all analysis, estimates, prognosis, forecasts, market reviews, weekly outlooks or other similar assessments or information (hereinafter “Analysis”) published on the websites of Admiral Markets investment firms operating under the Admiral Markets and Admirals trademarks (hereinafter “Admirals”). Before making any investment decisions please pay close attention to the following:
1. This is a marketing communication. The content is published for informative purposes only and is in no way to be construed as investment advice or recommendation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
2. Any investment decision is made by each client alone whereas Admirals shall not be responsible for any loss or damage arising from any such decision, whether or not based on the content.
3. With view to protecting the interests of our clients and the objectivity of the Analysis, Admirals has established relevant internal procedures for prevention and management of conflicts of interest.
4. The Analysis is prepared by an independent analyst (hereinafter “Author”) based on Brandie E Blackler, Financial Analyst and Writer, personal estimations.
5. Whilst every reasonable effort is taken to ensure that all sources of the content are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admirals does not guarantee the accuracy or completeness of any information contained within the Analysis.
6. Any kind of past or modeled performance of financial instruments indicated within the content should not be construed as an express or implied promise, guarantee or implication by Admirals for any future performance. The value of the financial instrument may both increase and decrease and the preservation of the asset value is not guaranteed.
7. Leveraged products (including contracts for difference) are speculative in nature and may result in losses or profit. Before you start trading, please ensure that you fully understand the risks involved.