Activist investors are investors that buy large percentages of a public company with the goal of influencing its operations. Many activist investors specialize in turning around companies with weak or average performance by forcing shareholder votes that change the company's leadership and/or cause the company to sell assets or divest from unprofitable business lines to increase profits.
Investing alongside these institutional investors can prove to be lucrative, as you're leveraging their experience managing companies to enhance earnings.
How to use the activist investor scenario?
The activist investor scenario can be used for both short-term (1 day) and mid-term (3-18 month) trades. Often, the shares of the company rise on the news that an experienced investor is going to push for greater profitability. This results in a positive 1 day move on the share price.
Large gains are to be had when the activists actually start rolling up their sleeves and getting to work. A classic pattern can be viewed when examining the activists that got involved with Salesforce.
In the chart below of Salesforce (CRM), you can see the stock had been selling off and was down over -60% from its high.
What caused the turnaround? An activist investor (note #9) came in and began pushing for changes.
The classic script for change is to cut costs, sell assets, and reward shareholders with cash back. And that is just what they did.
Below is the series of events that followed which turnaround the stock by +60%...
In summary, the activist pushed for mass layoffs to save money - this included firing one of the CEOs. They then used to savings to reward shareholders with buybacks of the stock, raising the stock's value per share.
A second activist investor joined and the layoffs and buybacks continued thereafter. These moves changed the trajectory of the company and the share price over a 5-month period, resulting in the price of CRM rising +60% over this time period.
Over the course of the previous year, events within the activist scenario averaged a 5% 1 day price move and much larger gains over subsequent months, as shown in the scenario description.
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