Shareholders Kick Down the Gates

April 22, 2014

  • The “Wall Street Rule” repealed… and your chance to seize the moment
  • A sector where foolish investors can’t resist buying high and selling low
  • Biotech sell-off? Not if you own a company delivering on its promises
  • The real reason gas prices are rising (and it’s not exports of U.S. gasoline)
  • Startup kicks sand in regulators’ faces… the surest sign of a budding terrorist… another incoming “Piketty wave”… and more!

  “It was called the Wall Street Rule,” Louis Lowenstein wrote in his classic Sense & Nonsense in Corporate Finance. “If you don’t like management’s performance, don’t do anything about it; just get out.”

The rule all but guaranteed the world’s most incompetent and/or overpaid CEO was bulletproof. Invulnerable. The only choice of frustrated shareholders was to sell and walk.

  No more. “Now shareholders kick down the gates,” says our Chris Mayer. “They force changes and even give CEOs the boot.

“It’s called activist investing, and it’s become one of the most successful investing strategies in the world.”

Chris points to the example of the Third Point hedge fund, run by Dan Loeb. In the summer of 2011, Third Point took a huge stake in Yahoo. Loeb put immense pressure on the board to dump the CEO — and succeeded. Then Third Point got three seats on the board and pushed for Marissa Mayer’s installation as CEO.

“The stock has more than doubled since Loeb bought shares,” says Chris.

Since 2006, almost one-sixth of companies in the S&P 1500 have faced an activist campaign — some more than once. “As a group,” Chris explains, “activists have beaten their complacent peers by a wide margin. Since 2009, activist funds earned nearly 20% annually, versus just 7.5% for other hedge funds.”

 Now comes the next chapter — what activist investor Bill Ackman calls “the most strategic and value-creating transaction I have ever analyzed.”

Ackman is teaming up with Valeant Pharmaceuticals to try to buy Allergan, the maker of Botox. “The coming together of Mr. Ackman and Valeant marks an unusual marriage between activism and more traditional corporate dealmaking,” says this morning’s Financial Times.

“This is a harbinger of a much wider range of kinds of deals,” Stanford business law professor Ronald Gilson tells The New York Times. “There are a lot of people with a lot of money who can act very quickly, and they don’t have to do things that look like last week’s deal.”

  “It’s a good time to be an activist,” Chris Mayer sums up.

“The economy is sluggish. It is not easy to grow. Numerous firms sit lazily on rotting cash. There are many corporate kingpins with token ownership in the companies they run. And poor incentives lead to lousy results for shareholders. We have custodians, but what we need are capitalists.”

Three of the 10 positions in Chris’ Capital & Crisis portfolio benefit one way or another from activist investors. The one that’s up the most — 252% — has profited mightily from Ackman’s activism. “Whenever you see an activist go public with his case,” says Chris, “sit up and pay attention. Something good may be about to happen.”

  Stocks are rallying this morning, and small caps are rallying strongest. At 1,879, the S&P 500 is barely 10 points away from its all-time high, reached at the start of this month.

  “When investing in restaurant stocks, many investors still just don’t seem to get it,” says Rick Pearson, editor of our newest service — Agora Financial’s Catalyst Trader.

“Small investors and private equity firms seem to have a tendency to pile in at the top,” he explains, “just at the point when things seem like they can’t get much better. Shares of Chipotle Mexican Grill (CMG) have recently fetched over $600 — more than 50 times trailing earnings. Likewise, Buffalo Wild Wings (BWLD) has traded at north of $150 per share — nearly 40 times trailing earnings.

“The problem is that the shares have largely mirrored or outpaced the financial performance of these chains to the point where it is becoming increasingly difficult to squeeze any more value out of them.

“When I see a situation like this, I always make sure to remind myself (and others) that the reason we invest in the stock market is simply to make money, not to own fashionable brands.”

With that in mind, Rick urged his readers last week to pick up shares of a restaurant chain that’s down 80% since 2007 — “a nearly perfect contrarian play.” It looks like buyout bait… and even if a buyout doesn’t happen, current management is in the early stages of a turnaround effort that’s already paying off.

Right there you have two of the five “Newton’s Secret Profit Triggers” that can deliver big gains in little time: In this case, Rick figures a quick 50% run-up whenever the trigger hits. For access to Agora Financial’s Catalyst Trader, look here and act soon: A special charter-subscriber rate is still available, but only through midnight Thursday.

  “Biotech stocks are getting cheaper under current market conditions, which sets us up for future profits,” says Technology Profits Confidential editor Ray Blanco.

The Nasdaq Biotech Index is off nearly 15% from its high two months ago. “I’m hoping the market sells off some more,” says Ray, “because it will give us a shot at some really good biotech bargains with solid technology and profitable future prospects.

“It’s easy to forget that despite the current state of the markets in general, and biotechnology stocks in particular, many small biotechs are still moving their products from the lab and clinic to the market. In the biotech world, this is the road to profitability and share appreciation over time.”

Case in point: a firm Ray recommended in January of last year, working on a treatment for Duchenne muscular dystrophy — a horrendous disorder that causes the muscles of boys to atrophy. Few of its victims live beyond age 30.

Yesterday brought word the FDA will allow the company to file a New Drug Application. Shares leaped 50% on the news.

Not one of Ray’s readers yet? You can remedy that at this link.

  “My husband and I spent countless nights wondering if and when we would lose our home, or if we would have to stop treatment to keep a roof over our heads,” says Kimberly, a woman with a chronic illness that keeps her from working. “Airbnb saved us.”

If you haven’t heard of it, Airbnb links you up with people who, for instance, might want to rent a spare room from you while visiting your town. A simple and elegant concept that’s quickly become a $10 billion company, Airbnb might go public this year.

As you can imagine, hotel operators don’t much like Airbnb — any more than taxi operators like Uber, the car-sharing company whose ups and downs we’ve chronicled from time to time.

Enter today’s New York Times: “Regulators as well as some elected officials across the country are increasingly questioning the presumptions and tactics of these startups,” the Gray Lady tut-tuts, “especially the notion that laws do not apply to them.”

Oy.

New York’s attorney general believes 60% of Airbnb rentals in New York City are illegal — because it’s against the law to rent out an apartment for less than a month.

As part of its public-relations campaign, Airbnb has posted the case of Kimberly, who lives with her husband in the East Village. “Kimberly and Ray’s average monthly Airbnb earnings total less than the amount available through New York unemployment benefits,” says Airbnb’s website. “But it allows them to remain afloat and independent, in the apartment and the city they love.”

Kimberly and Ray: unwitting targets of busybody bureaucrats

Airbnb will slug it out with the state in court today. The state has subpoenaed the records of Airbnb hosts in New York City. In an additional sign Airbnb has some public-relations smarts, it said the following of the court case in a blogpost. “They’ll call us slumlords and tax cheats. They might even say we all faked the moon landing.”

Heh…

 The dollar is rallying, and the commodity complex is tanking.

The dollar index is back within a hair of 80. As such, gold has slipped $10, to $1,280, and crude has pulled back more than $1.50, to $102.84.

  Gas prices are up. Cue the foreign boogeymen.

The national average for a gallon of self-serve unleaded sits at $3.69 this morning — a 13-month high. “The most important factor right now in this rise is crude oil, which rose by a very similar amount to the street-price move,” says Trilby Lundberg in her authoritative biweekly Lundberg survey of gas prices.

Of course, with U.S. crude production zooming upward, blaming foreign boogeymen is harder than it used to be.

But today’s Wall Street Journal gives it the ol’ college try: “A new pipeline, built to release a glut of crude oil that was stuck in the middle of the country, is now feeding oil to refineries on the Gulf Coast that churn out gasoline and diesel. While these fuels still make their way to the Southeast and the East Coast, growing amounts are being sold to Mexico, the Netherlands, Brazil and other countries.”

How dare those furriners buy our refined products!

  “An obscure 1920 law is costing Americans billions of dollars a year in higher fuel costs,” writes the Independent Institute’s William Shughart — with an angle the Journal overlooked.

“The Jones Act requires that cargo shipped from one U.S. port to another be carried on a U.S.-registered vessel, built, owned and crewed by Americans…

“Every day,” Shughart writes in the New York Post, “the law adds to energy bills because it stops foreign-flagged tankers and barges from shipping among U.S. ports. They can’t help move crude from Gulf Coast ports to East Coast refineries, or supply Florida with oil from Louisiana and Texas ports or ship oil between West Coast and Alaskan ports.”

Big Labor, weakened though it may be, remains strong enough to prevent the Jones Act’s repeal. They claim thousands of shipyard and maritime jobs would be lost.

“The near-disappearance of the U.S. shipbuilding industry,” Shughart retorts, “renders that argument moot.”

  It’s come to this: Teenage rebellion is the mark of a budding terrorist.

Or so the “assistant to the president for homeland security and counterterrorism” believes.

Lisa Monaco is her name. She delivered an interesting speech last week at Harvard. To fight the threat of “homegrown violent extremists,” it’s up to “local communities” to help spot the “warning signs” that someone is becoming “radicalized to violence.”

“For instance,” Monaco then suggested, “parents might see sudden personality changes in their children at home — becoming confrontational.”

For real.

Lisa Monaco: On the lookout for “homegrown violent extremists”…

lest we be sapped of our precious bodily fluids.

Three thoughts occur to us in rapid succession…

1. It’s a good thing Homeland Security wasn’t around when your editor was growing up.

2. We thought the hallmark of an authoritarian/totalitarian state was when kids were encouraged to rat out their parents; this is surely an innovative twist.

3. Frustrated parents everywhere can now threaten their obstreperous young ‘uns: “If you don’t shape up, Barack Obama will drone your ass!”

Don’t laugh. He’s already done it to a 16-year-old U.S. citizen. Not under those exact circumstances, but the precedent is there…

  “The Piketty wave continues,” one of our regulars informs us. “Class warfare is being debated.”

A month ago, we tipped you off to a new book called Capital in the 21st Century by the French economist Thomas Piketty. Its 696 pages can be summed up as follows: “Income from work good. Income from investments bad. Needs moar wealth tax.”

Our alert reader points us to recent articles in The Daily Beast and The Washington Post. Bleah.

We take more comfort from an Op-Ed at the New York Sun — noticing what we noticed nearly two years ago. “Income inequality” began its relentless rise in 1971, the very year President Nixon cut the dollar’s last tie to gold.

“This is the question the liberals don’t want to discuss, even acknowledge,” it says. “They are never going to get it out of their heads that the gold standard is a barbarous relic. They have spent so much of their capital ridiculing the idea of honest money that they daren’t open up the question. It doesn’t take a Ph.D. from MIT or Princeton, however, to imagine that in an age of fiat money, the top decile would have an easier time making hay than would the denizens of the other nine deciles, who aren’t trained in the art of swaps and derivatives.”

Yep…

Cheers,

Dave Gonigam

The 5 Min. Forecast

P.S. Here come the regulators to save the day.

When it comes to high-frequency trading (HFT), “All five commissioners are very focused on these issues and are committed to making sure the market is fair and efficient and promoting capital formation,” says Kara Stein of the Securities and Exchange Commission.

She won’t be drawn on specifics… but whatever they come up with, we’re reasonably sure it will make the situation worse.

Meanwhile, we continue to get an overwhelming response to our “HFT protection kit” — available nowhere else. It’s a copy of Michael Lewis’ best-seller Flash Boys paired with our special report Five Simple Words to Beat the Flash Boys.

We can put the book in your hands for $4.95. And the report for free. Take advantage now: When our stash of books runs out, so does the offer.

rspertzel

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