(Andrew Ross Sorkin)
If you listen to C.E.O.s and politicians on the stump these days, you would get the sense that most activists are dangerous quick-buck artists.
Carl C. Icahn, who has agitated for stock buybacks and dividends at companies including Apple, Motorola and Dell, has been described as a “financial parasite,” a “greenmailer” and a “corporate raider.”
“The bulk of activism just wants a quick hit. They want the stock to go up next week,” Warren E. Buffett said last month at a Fortune magazine conference.
Hillary Rodham Clinton has derided what she describes as “quarterly capitalism,” driven, in large part, by activists. “We need a new generation of committed, long-term investors to provide a counterweight to the hit-and-run activists,” she said in a July speech at New York University.
It’s a clean, simple and popular narrative. And it feeds directly into the debate about whether companies are focused too much on the daily fluctuations of their stock prices and not investing enough in their long-term futures.
Yet the data about how long activists like Mr. Icahn actually hold shares in companies, makes the narrative fuzzier — or at least more complicated. In many instances, activists may be holding shares longer than many institutional or retail investors.
Mr. Icahn’s average holding period for an individual stock is not a month or two, — or even a year. It’s more than three years, according to 13D Monitor, a data service that tracks activist investors. And it can be even longer, given that the calculation doesn’t include several stocks in his portfolio that he’s owned for 20 years, and in at least one case more than 30 years.
“The real money I’ve made over the years is holding companies for seven, eight or nine years,” Mr. Icahn said on Tuesday at a New York Times DealBook conference. “You got to buy them when nobody wants them, that’s the real secret.”
Trian, Nelson Peltz’s company, which has agitated for change at companies like Heinz and DuPont and recently made a $2.5 billion bet on General Electric, also holds its investments, on average, for about three years. When he takes board seats as a way to bring about change, the holding time is even longer, because selling stock as a board member is more difficult because of insider trading issues.
Holding a stock for three or four years doesn’t make them Mr. Buffett, who owns stakes in companies for decades. But set against the average investor, activist investors may look like Rip Van Winkle.
According to data compiled by the global investment manager MFS after it sifted through New York Stock Exchange records, the average equity in 2014 was bought and sold in just 1.92 years. Mutual fund managers turn over their portfolios every 1.45 years, according to MFS. “Stocks are being held for record-short periods of time,” MFS wrote in a report.
“Until the 1970s,” the report said, “the investment landscape was largely dominated by wealthy individuals and families; this has since changed markedly, with professional investors now accounting for the largest share of investment activity, though it should be noted that these professionals manage significant mutual fund asset pools that are driven by retail investors.”
Mutual fund managers may be focused on the short term because most consumers of investment products are no more oriented toward the longer term than activists. The average mutual fund is held for only 3.3 years, according to Dalbar’s 2015 Quantitative Analysis of Investor Behavior.
None of this is meant to excuse activist shareholders’ seemingly short-term financial engineering efforts, like buybacks, dividends, spinoffs and sales, which can quickly send shares spiking while potentially leaving the company more vulnerable later, especially when a company uses borrowed money to buy its own shares.
“The S.&P. 100 companies are paying out 108 percent of earnings through dividends and stock repurchases. That can’t last,” said Laurence D. Fink, chairman and chief executive of BlackRock, the asset manager. He blamed activists, in part, for why companies pursue such steps.
Mr. Icahn, of course, has another view: He suggests that he is pushing for measures to help flailing companies improve their long-term prospects.
“You have people that run companies that aren’t bad people but shouldn’t be running the companies. They’re over their head or they have different agendas,” Mr. Icahn said. “The reason I made so much money over the years is you hold these people accountable.”
Whether value is being created or destroyed is still a subject of debate, but there has been little attention paid to the actual holding periods of activists.
William A. Ackman of Pershing Square Capital Management, the activist investor who took on Herbalife, owns shares for about a year and a half. His longest current investment, in the Howard Hughes Corporation, a real estate company, was bought in 2010, according to 13D Monitor.
Starboard Value, which has taken big stakes in Office Depot and Darden Restaurants, also holds its stakes, on average, for about a year and a half. ValueAct Capital, which recently took a stake in American Express, sticks around, on average, for two years, according to 13D Monitor.
For advocates of long-term investing, the goal perhaps should be as much about pressing activists to think long term as persuading the rest of us to do the same.
Barrons Summary: positive on GM, PAH, HPQ; cautious on NUS
Cover story: For people facing retirement, long-term care "is the elephant in the room than can upend an otherwise meticulously crafted retirement plan"; Story delves into the pros and cons of aging at home, one-stop senior living facilities, and assisted living facilities.
Features: 1) Positive on GM: The automaker continues to boost profitability; the recent 2% boost in shares simply corrects an undeserved midyear selloff; shares could hit $48, or eight times earnings, for a return of about 40%, including the dividend yield of nearly 5%; 2) Cautious on NUS: Company's charitable program to provide VitaMeals to kids in poor nations brings some risk and poses a number of questions for investors; 3) Positive on PAH: Shares have fallen 60% over concerns about leveraged options, but chief executive and founder Martin Franklin has an strong track record of making roll-ups work, and the stock could see a rebound; 4) Positive on HPQ: Printer and PC half of newly split Hewlett-Packard should be able to maintain the profitability of its leading businesses despite volume declines, and return money to shareholders via buybacks and dividends; 5) A look at picks from the investors who attended the Invest for Kids conference in Chicago (HZNP, CPN, GMCR, ZNGA, GSK, BIDU, RBS, CF, EROS, crude oil, commercial and foreign real estate, Manhattan real estate, junk debt).Tech
Trader: Tech startups are increasingly taking their time going public, creating a growing divide between public and private technology investors; "Popular private start-ups continue to attract cash at higher valuations, but the public has all but turned its back on them"; Underwriters are facing some pushback over valuations during the roadshows that occur between IPO filings and final pricing.
Trader: "The market assessment of the probability of a rate hike has increased markedly since the last FOMC meeting," says J.J. Kinahan of AMTD; Positive on MCD: Howard Penney of Hedgeye Risk says the fast-food chain is successfully managing a turnaround that should continue and send shares up; VRX: A further drop in the pharma company's share price "could have an unpleasant spillover effect on the entire market."
Follow-Up: NSC: Shares have taken a hit because of falling oil prices, but the company has been restructuring, furloughing crews, and taking locomotives out of service, and shares could see 18% upside; RL: With incoming chief Stefan Larsson about to take the reins, investors should hold on to shares, which could have 15% upside, not counting the 1.5% dividend yield; ATVI: The KING acquisition will make the company a leader in the fast-growing casual-gaming segment and give it access to King's $900M cash flow on reasonable terms.
Profile: Gary Miller of the Victory Sycamore Established Value fund says a selling discipline is as important as the buying process (top 10 holdings: UNM, DG, XYL, CFG, Y, DDR, STI, XRAY, ATO, XEL).
European Trader: Armundi: "Europe's biggest asset manager could reward investors with quick profits when its shares begin trading in Paris next week."
Asian Trader: A look at how to beat the MSCI Emerging Markets index, more than two-thirds of which consists of Asian stocks (long on Samsung Electronics, TSM, Tencent Holdings; short China Mobile; avoid China Construction Bank, ICBC, and Bank of China).
Emerging Markets: With presidential elections on the horizon in Argentina, the country's stocks and bonds are already rallying on prospects for fiscal and monetary reform.
Commodities: "Big cuts in copper production may have given prices a bump, but any gains will be fleeting until demand returns."
Streetwise: An interest-rate hike will allow banks to earn more money on loans and realize better returns on their investments, boosting earnings--but new regulations could lessen the effect.
“I think that all cars will go fully autonomous in long-term. I think it will be quite unusual to see cars that don’t have full autonomy,” Musk said.
“Any cars that are being made that don’t have full autonomy will have negative value. It will be like owning a horse. You will only be owning it for sentimental reasons,” he added.
In 15 to 20 years, automakers will be rolling out fully autonomous vehicles, he said. However, Tesla will have its driverless car ready a lot sooner, he said.
In September, Musk told the Danish new site Borsen that his company's driverless cars would be ready in three years.
Tesla, of course, is already moving its vehicles closer to autonomy.
In October, the company launched its Autopilot system, which offers semi-autonomous safety and convenience features. The system enables functions like automatic braking, automatic steering, self-parallel parking, and automatic lane change. And Tesla uses each car's experience to help other cars learn and improve.
Given that Tesla is betting so big on autonomous vehicles, it's not surprising that there's speculation the company may also be planning to get into transportation services.
During the conference call on Tuesday, Musk was asked if Tesla plans to eventually sell its fully autonomous vehicles to companies like Uber or if it might consider launching its own ride-sharing service in the future.
Musk first declined to comment, but then said that the company's strategy regarding the business was only "half-baked," implying that Tesla may at least be considering mobility services as a new business.
What Hedge Fund Stars Are Buying and Selling
At Chicago’s annual Invest for Kids conference, major investors recommended stocks like Royal Bank of Scotland, Zynga, and Calpine. To be avoided? Manhattan apartments and a Bollywood studio.
Some of the bullish stock recommendations were surprising: members of unloved sectors like pharmaceuticals, power production, and commodities, as well as a European bank that’s been bailed out more than once, and even a few perennial short-selling favorites. Among the most intriguing pans was a Bollywood film studio whose theatrical sense, in one investor’s claim, extends to its accounting.
Drawing particular interest this year were the ruminations of two real-estate moguls, Sam Zell and Barry Sternlicht. Just last month Sternlicht’s Starwood Capital Group, which oversees $50 billion in assets, purchased roughly a quarter of Zell-controlled Equity Residential ’s (ticker: EQR) multifamily apartment REIT portfolio for $5.4 billion.
Zell, in a chat with an interviewer, said the transaction was a win-win. The deal allowed Equity Residential to monetize its holdings in suburban rental properties so it could concentrate on major central business districts around the country where he thinks the millennial rental market will flourish. Sternlicht, in his interview, contended that the acquired portfolio is of high quality, fully rented and generating an attractive internal rate of return.
The cast for Invest for Kids included, top row from left, Astenbeck Capital’s Andy Hall, Starwood Capital’s Barry Sternlicht, and Deerfield’s James Flynn; and bottom row from left, GoldenTree’s Steven Tananbaum, Glaucus Research’s Soren Aandahl, and Sam Zell of Equity Residential. What’s in for them? Everything from a beat-up European bank to an out-of-fashion game maker. What’s out? Manhattan apartments.
But it was in the offhand remarks of the pair that real interest lay. Zell, the self-proclaimed Grave Dancer of yore, seemed downbeat about the current real estate cycle. He complained that the torrent of liquidity unleashed by central-bank money-printing globally has made his style of scooping up bargains untenable in real estate, stocks, and other assets because of the “destructive competition” it has spawned. Markets in this cycle never properly cleared. As for the commercial real estate cycle, it’s now in its “eighth inning.” Likewise, Zell doesn’t see much opportunity elsewhere in the world after taking some lumps in his Brazilian housing ventures.
Several remarks by Sternlicht, the darling of sovereign-wealth funds, also raised eyebrows. He bemoaned the promiscuous monetary policies of central banks as acutely discomfiting. He worries about the currency wars and global geopolitical risks that have flared up.
“Japan with its high debt-to-GDP ratio is now a giant Ponzi scheme,” he declared. “Stock market price swings scare the s*** out of me.”
Sternlicht pulled no punches. He also thinks the high-yield debt market could see a major crash. And he sees the midtown New York residential market on the precipice of an epic collapse. “The Arabs and Russians are leaving, and there isn’t enough new money flowing in from Asia to support current prices,” he observes. He worries that the falling value of the Canadian dollar is going to hurt tourist traffic from Canada, the biggest source of international visitors. There is at least one positive factor in the current U.S. real estate environment: Slow economic growth in the U.S. has deterred the overexpansion of capacity
Hedge fund manager James Flynn of Deerfield Management in New York, known for his outsized performance in health-care and pharmaceutical stocks, sounded more like an Old Testament prophet than an analyst when he excoriated Valeant Pharmaceuticals International ’s (VRX) management for its pricing, sales practices, and financial engineering. The firm’s troubles are far from over, given the company’s rollup-generated debt leverage and regulatory and legal problems, he says. As an alternative, he recommends Horizon Pharma (HZNP), which has long-term exclusivity on most of its drugs, and manageable debt. He believes the stock could double in the next several years.
Steven Tananbaum of GoldenTree Asset Management in New York likes Calpine (CPN), a gas and geothermal power producer, which he contends is a high-quality company selling at a low valuation. Its free cash flow will be more than ample, and it has plenty of past net operating losses to shelter earnings from taxes.
Ricky Sandler of the New York hedge fund Eminence Capital offered up several stock picks that aren’t without some controversy— Keurig Green Mountain (GMCR) and Zynga (ZNGA). The former stock could surprise on the upside because the company has gotten better cost control of its brewers and continues to buy back stock. Keurig’s move into the single-serve cold-drink market with Coca-Cola could achieve incredible scale and profitability given the global size of the market, he contends. The stock market is ignoring this potential.
As for Zynga, the company has a large base of monthly users of its social-Internet games but was slow making the transition to mobile devices. That has been corrected, however, and Sandler has high hopes for its roster of new games.
Several international stocks are favorites of Chicago’s Ariel Investments’ Rupal Bhansali. The first was GlaxoSmithKline (GSK), which in her estimation is cheap, with a forward price/earnings ratio of 16 and dividend yield of 6%. The loss of its patent protection on the respiratory blockbuster drug Advair is now in the company’s rearview mirror. Meantime, Glaxo is a major manufacturer of vaccines, a tricky business, and this figures to propel future earnings. A new management team was brought in to run its consumer-products operation, boasting such offerings as Flonase and Aquafresh, with the promise of doubling margins.
She also buys into the bright future of the Chinese Internet-search company Baidu (BIDU). She claims that by Chinese standards at least, Baidu has a decent balance sheet. Also, its Chinese management team seems to embrace what she calls “Anglo-Saxon standards” when it comes to accounting and transparency. In the closed garden of the Chinese Internet, she thinks Baidu has the potential of becoming the Sino version of Google, Expedia, YouTube, and Groupon all rolled into one.
N. David Samra of Artisan Partners in Milwaukee admits to having long abhorred investing in banks because of their opacity, commodity-like nature and loan-underwriting mistakes. He has made an exception though for the Royal Bank of Scotland Group (RBS), which, of course, had to be bailed out by British authorities not once but twice in recent years and is still 73%-owned by the government. But at this point RBS has been whittled down to its strong core operations, with negligible funding risk and strong capital ratios. RBS stock, selling for below book value, has plenty of room to run, he contends.
John Burbank, founder of the San Francisco hedge fund Passport Capital, is bearish on commodities, China, and the U.S. stock market. He asserted that 2016 will feel like a recession in the U.S. if not officially qualifying as such.
Yet he is long the dollar and a major nitrogen-fertilizer company in North America, CF Industries Holdings (CF). Unlike companies like Mosaic that mine potash and phosphates, CF is relatively immune from global competition because of the cheapness of its feed stock, natural gas, in the U.S. The company is also protected by high barriers to entry, given the expense of building new production plants. Finally, he’s also heartened by the pace at which the company is buying back stock.
Longtime oil-market trader Andy Hall of Astenbeck Capital Management in Southport, Conn., argued in his presentation that crude prices will soon be rising because actual production and consumption demand data indicate that the supposed oil surplus is lower than commonly thought. Of course, he has been an obdurate bull on oil prices for much of the recent slide in crude, and his fund’s performance has suffered accordingly. But, perhaps, he will feel vindicated with all the trouble in Nigeria, Venezuela, and the Middle East, and with U.S. shale production starting to tip over.
Perhaps the most entertaining presentation of the conference came from Soren Aandahl of the Austin, Texas–based short-selling concern Glaucus Research Group. His target was an Indian-based film producer and distributor Eros International (EROS). The company’s stock price has collapsed from around $32 to $13 in the last four weeks, but Aandahl says it will eventually be a goose egg. He claims the company’s make-believe extends far beyond its fare of Bollywood movies to its income statements and balance sheet. A large part of Eros’ founding Lulla family is involved in the company. Corporate funds, he claims, have been used for deals in which relatives are overpaid for their production of various films. The crowd loved the story.
Bullish on Convertible Bonds
Morgan Stanley’s Kevin Peters has seen the advisory business from both sides—advisor and client. Now he advises generations of investors.
Financial advisors sometimes lack the ability to see the world with the eyes of a client, but that’s not an issue for Kevin Peters.
As a recent business school graduate in the early 1980s, he helped his in-laws sell their New York City–based fur business—a job that turned out to be trickier than expected. “I saw all the issues and problems, from estate planning to family dynamics,” Peters recalls.
Having successfully navigated that job, Peters decided he could help guide others through their personal financial challenges. He literally went door to door seeking interviews with the big financial firms, and was ultimately hired by Smith Barney.
He found plenty of demand for his services: Today, the 57-year-old Morgan Stanley advisor and his team of eight manage $2 billion of assets and advise on an additional $2 billion.
Peters’ clients, including executives, entrepreneurs, and real estate investors, rely on him to find less-traveled investment opportunities.
“I try to see around the next corner,” he says, “to invest where the herd is not there yet.”
Peters’ investing vision has proved to be quite sharp in recent years. Concerned about their cash-flow issues and overpopularity,
he dumped master limited partnerships starting in June 2014. In doing so, he sidestepped an ugly meltdown. The S&P MLP Index (ticker: SPMLP) has plunged 30% over the past 12 months.
Now, Peters sees opportunity off the beaten path in two credit plays: crossover corporate bonds and contingent convertible bonds.
A NATIVE OF MIDDLETOWN, CONN., Peters demonstrated the ability to attract money from an early age. At 14, he ran a three-person landscaping business; by 17, he’d created a profitable business maintaining, cleaning, and piloting boats.
Peters went on to earn a business and finance degree, with a minor in business law, from the University of Kentucky. Though undecided at the time about which industry interested him most, he was sure about one thing: He wanted a position of leadership.
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Little surprise, then, that he found his way to financial advisory. Helping clients navigate the most turbulent stretches of their financial lives is a role he finds both challenging and satisfying.
To illustrate this, Peters points to an episode in which he saved a client $300 million. A high-ranking corporate executive, the client found himself with more than $400 million in company stock, in the wake of his company’s initial public offering. At Peters’ urging, the executive sold off a large chunk of this concentrated position, channeling the proceeds into a diversified investment portfolio. It was a difficult message to deliver, since selling meant breaking from his fellow executives. Soon afterward, the company went out of business.
“Being a trusted advisor means having the courage of your convictions to tell someone what they might not want to hear,” he says.
Peters describes himself as a value investor, and in the broadest sense—he looks beyond stocks to find bargains. Today, he sees contingent convertible bonds, issued by European banks to raise capital, as one of the best plays available. Banks issue “coco” bonds as debt, but they convert into equity when their issuer’s capital falls too low. By by focusing on high-quality bonds from companies with improving balance sheets, Peters is getting yields of 6.6% and higher.
Peters also sees bargains in the world of crossover corporate bonds, so named because they are judged to be investment grade by one credit rating agency and junk by another. The split ratings of crossover corporates often prevent banks from investing in them, and the suppressed demand can result in lower prices. Right now, Peters and company are finding yields as high as 9% for five-year issues.
“There’s tremendous opportunity right now due to extreme dislocation in the crossover corporate credit market,” he says. “Bonds have traded down 10% to 20%, and nothing’s changed.”
BROADLY PETERS THINKS we’re in the late-middle stage of expansion. “The world is growing much slower than anyone would want it to,” he says, but growth, such as it is, figures to continue for a while.
So completely does Peters immerse himself in his job that it took him 15 years to fully grasp how deeply intertwined he had become in his clients’ lives. “In the late ’90s, I had four or five second-generation clients, and, a couple of years later, I had 10 or 12 of them,” he explains. “We’d guided and protected them through ups and downs—and that defined to me that I had become successful.”
Pocket the Profits From an Amundi IPO
The French asset manager is going public in choppy markets. The IPO will fly, but tougher regulations and competition will pose challenges.
But the stock’s long-term prospects are less certain, so shareholders may want to immediately pocket any gains from attractive pricing that may be required to ensure that the initial public offering is a success.
The shares are expected to begin changing hands on the Euronext Paris on Nov. 12, under the ticker AMUN.France.
It isn’t the best time for Amundi to make its debut; the market is challenging, even though the benchmark CAC 40 index is up 16% in 2015. Just two weeks ago, French music-streaming service Deezer scratched its plans to go public, citing market conditions.
NONETHELESS, EUROPE IS holding up better than other regions. In 2015, the 82 IPOs there have raised $47.5 billion, compared with 99 deals worth $56.4 billion last year. Worldwide, the picture is worse. The number of IPOs is down 19%, year on year, and volume in dollar terms has shrunk 30%. Depressing the global figures is the fragile environment in China, where the stock market has plunged almost 50% since Jan. 1, although lately it’s turned up.
“Europe is weak, but it is the cleanest of all the dirty shirts in the IPO market,” says Kathleen Smith, a principal at Renaissance Capital in Greenwich, Conn., adding that investors are “price-sensitive.”
The difficult landscape means that Amundi could be forced to price its shares below the top end of its range between 42 euros and €52.50 ($45.70 and $57.12), leaving potential upside on the table for investors who buy into the launch.
In contrast to some of the loss-making Internet companies that have struggled to get their initial offerings off the ground, Amundi should have no problems. As one of the world’s largest asset managers, with €954 billion under management, it has a strong brand, it is profitable, and it offers investors earnings visibility.
“This is a deal that is going to get done,” says Smith, adding that Amundi would be included in the Renaissance International IPO ETF (ticker: IPOS).
In its prospectus, Amundi disclosed that it expects to earn €515 million to €535 million in 2015, compared with €490 million last year.
Its shares will price at about 15 to 17 times 2015 estimated earnings, in line with its peers. Asset-management industry leader BlackRock (BLK) trades for about 18 times projected 2015 profits.
Amundi plans to sell 33.36 million shares, equivalent to a 20% stake, or 38.36 million shares if an over-allotment is exercised.
Based on the indicated price range, proceeds from the sale, including the over-allotment, would run between €1.61 billion and €2.01 billion, valuing Amundi at €7 billion to €8.75 billion. It will be the biggest initial public offering in France in two years.
In tandem with the IPO, controlling shareholder Crédit Agricole (ACA.France) will sell a 2% stake in Amundi to an arm of the Agricultural Bank of China, a joint-venture partner in China. Crédit Agricole’s stake in Amundi will drop to about 75% from 80%. Crédit Agricole and Société Générale (GLE.France) pooled their asset-management businesses in 2010 to form Amundi, whose customers include some 2,000 institutions and 100,000 retail investors.
The IPO allows Société Générale to exit Amundi through the sale of its 20% stake. And it provides Amundi with the currency to pursue mergers and acquisitions.
AMUNDI OFFERS A FULL RANGE of investments, from equities and fixed-income products to exchange-traded funds, and it has a strong and diversified presence in more than 30 countries.
It is more efficient than most of its peers. Its cost/income ratio is about 53% and it expects that figure to remain below 55% over the next three years.
“In a world where low-cost investing is gaining market share, and fees are under pressure, Amundi’s reduced cost base is a key competitive advantage to retain its retail customers and compete for institutional mandates,” says Roland Petitjean, financial sector analyst at La Française Inflection Point in Paris.
Nonetheless, Petitjean reckons that regulation, notably tougher capital requirements, along with increased competition, could weigh on Amundi’s profits over the next three years, even if the asset manager meets its goal of €120 billion in inflows. He calls Amundi’s targeted 5% compound annual growth in earnings “modest” and argues that it “does not warrant a material premium.”
With concerns over corporate governance and incentives for management, investors who can profit from the IPO may look elsewhere for long-term benefits.