General Electric Co. (NYSE: GE) is one of America's classic companies - more than a century old, one of the original components of the Dow Jones Industrial Average, ranks 8th in the Fortune 500.
And it just became a target of activist investor Nelson Peltz.
His Trian Fund Management said it had bought $2.5 billion of GE stock and is now a top 10 shareholder. Peltz wants GE to increase its cost-cutting and shift further away from financial operations.
Peltz's stake in GE is part of a shift in activist investing. Over the past decade, activist investors like Peltz have gone after bigger and bigger companies as their assets have grown.
Investors have poured money into activist funds in the hope of sharing the outsized returns for which activist funds are known. According to Hedge Fund Research, the 71 hedge funds classified as activist funds held $120 billion in assets in 2014, up from less than $40 billion in 2009.
So activist investors keep gaining more and more firepower - enough for the king of activist investors, Carl Icahn, to go after the biggest company in the world, Apple Inc. (Nasdaq: AAPL).
Since 2013, Icahn has influenced Apple's $140 billion stock buyback program and rising dividend payments. Icahn owns 53 million shares of Apple stock and is thinking of buying more.
For investors, this means that any stock you own could become an activist investor target. That's not necessarily a bad thing, but activist funds make fundamental changes to corporate behavior.
The top activist investors, which include such names as Dan Loeb of Third Point LLC and Bill Ackman of Pershing Square Capital, can make a lot more happen than just a boost in stock buybacks and dividend payouts.
Here's a look at what can happen to your stocks when an activist investor like Peltz or Icahn buys in...
What Carl Icahn, Nelson Peltz Are Capable Of
Activist investors often agitate for major changes.
Nelson Peltz convinced Kraft Foods Inc. to split off its snack food division as Mondelez Inc. (Nasdaq: MDLZ). Bill Ackman tried (unsuccessfully) to revive JC Penney Co. Inc. (NYSE: JCP). Carl Icahn pushed eBay Inc. (Nasdaq: EBAY) to split off its PayPal unit. Dan Loeb engineered the resignation of Yahoo! Inc. (Nasdaq: YHOO) CEO Scott Thompson and helped bring in Marissa Mayer to replace him.
And it seems the drumbeat of activist fund activity rarely lets up. Yesterday (Wednesday), just two days after we learned that Peltz had targeted GE, Carl Icahn announced that mining company Freeport-McMoRan Inc. (NYSE: FCX) had agreed to add two Icahn allies to its board.
So when a Carl Icahn or Nelson Peltz buys a large stake in one of your stocks, you need keep a close eye on the changes they're seeking.
But what they do can work to your advantage...
When an Activist Fund Targets One of Your Stocks
Most investors get nervous when they see on the news that an activist investor, particularly a legendary name like Carl Icahn, has taken a large stake in a company they own.
That's because activist investors have a reputation as Wall Street's "bad guys" - a reputation that isn't deserved.
No, the only people who need to fear activist funds are underperforming CEOs and boards. For retail investors, the arrival of a Bill Ackman, Carl Icahn, or Nelson Peltz is usually great news.
Remember: The goal of activist investors is to improve shareholder value. If they succeed with a stock you own, you'll profit as well.
A study done by The Economist earlier this year of the 50 largest activist positions between 2009 and 2014 showed that most of the time, profits, capital investment, and R&D have all increased.
And a study by the Alternative Investment Management Association (AIMA) found a 25% average increase in the share price of target companies in the two years after an activist investor had exited the position.
Of course, activist investors don't always win. Shares of JC Penney fell nearly 50% in the three years Bill Ackman used his stake to influence management.
But sometimes activist investors rack up big wins. Shares of Yahoo! rose from $13 to $29.11 (124%) between August 2011 and July 2013, the period Dan Loeb was active with the company. YHOO closed at $31.87 yesterday and reached a high of $52.42 last November.
And Nelson Peltz enjoyed an impressive 97% gain from his involvement with Wendy's Co. (Nasdaq: WEN) from 2011 to 2014, with the stock rising from under $5 to over $9. WEN closed at $8.87 yesterday, hitting a high of $11.67 in May.
How to Benefit from Activist Investors
So most of the time, if an activist investor targets one of your stocks, you should just sit back and enjoy the ride. You should have your own reasons for owning a stock; what a Carl Icahn or Nelson Peltz does should not change those underlying reasons, if they're sound.
But what about piggybacking on these trades? Should investors jump into a stock when a big activist investor announces he's just bought a big stake?
Maybe. Like any investment, an individual needs to decide 1) if that company really is a good buy, and 2) if it's a good fit for their investing style and portfolio.
But having said that, people like Carl Icahn and Nelson Peltz are pretty smart guys. If they see untapped value in a company, the stock is at least worth investigating.
In other words, don't blindly buy stocks targeted by the activist funds. Instead, view these stocks as possible additions to your portfolio - and only after you've done your homework.
Follow me on Twitter @DavidGZeiler.
Activist Investors Explained: Money Morning Capital Wave Strategist Shah Gilani recently took the time to make a video to give some background on activist investing and how it affects retail investors. Just click on the video below...
Should You Invest Like Carl Icahn and Other Activist Investors?Over the past decade, activist-run funds have returned nearly 267% – more than double that of the Standard & Poor's 500 index. Many investors would like to get a piece of that success. Should you invest like Carl Icahn, Bill Ackman, Dan Loeb, or other activist investors?
Posted by Money Morning on Wednesday, October 7, 2015
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.