Some hedge funds are known for their activist stances. Rather than just trading stocks, these funds seek to alter a company’s management structure, changing the way it operates for the benefit of shareholders.
Investors in companies with significant hedge fund involvement should be aware. Ultimately, the actions of fund managers could alter the future of companies like Herbalife Ltd. (NYSE:HLF), J.C. Penney Company, Inc. (NYSE:JCP) and Yahoo! Inc. (NASDAQ:YHOO) more than anything else.
Herbalife is locked in battle between Icahn and Ackman
Herbalife Ltd. (NYSE:HLF) hasn’t traded on fundamentals for nearly a year. During an earnings call last May, hedge fund manager David Einhorn asked the company’s management a number of skeptical questions.
That led to shares of the multi-level marketer selling off, as investors assumed that Einhorn (known for shorting companies like Green Mountain and Lehman Brothers) had bet against the company. However, the bear turned out to be a different fund manager, Bill Ackman.
Ackman revealed his short thesis back in December. In a presentation consisting of over 300 slides, Ackman alleged that the company was a pyramid scheme, and operating in violation of federal law.
Recently, The Verge did an investigation of its own, exposing the dubious tactics that many of Herbalife’s top distributors use online to get recruits. On Mar. 12, The New York Post reported that the company was cutting ties with many of these distributors.
What makes the Herbalife Ltd. (NYSE:HLF) story so intriguing is that the other side of the trade is occupied by a different activist hedge fund manager: Carl Icahn. Since his CNBC debate with Ackman back in January, Icahn has been snapping up shares of Herbalife and now owns about 15% of the company.
Icahn has named directors to Herbalife Ltd. (NYSE:HLF)’s board and has the right to purchase a full quarter of the outstanding shares. In an SEC filing, Icahn suggested that the company should explore strategic options including a going-private transaction.
Investors playing Herbalife Ltd. (NYSE:HLF) are really riding with either Icahn or Ackman. If Ackman is successful in getting regulators to act, shares could plummet. On the other hand, if Icahn can get Herbalife to go private, shares could rally in a violent short squeeze.
Dan Loeb is behind Yahoo! Inc. (NASDAQ:YHOO)’s recent rally
Dan Loeb’s involvement in Yahoo! Inc. (NASDAQ:YHOO) stretches back to the fall of 2011, when, in a presentation, he displayed the name of his fund, Third Point, in Yahoo’s characteristic font and color.
Loeb managed to force Yahoo! Inc. (NASDAQ:YHOO)’s founder Jerry Yang off the company’s board, and used his research resources to discredit former CEO Scott Thompson. Kara Swisher reported that Loeb was instrumental in recruiting current CEO Marissa Mayer to run Yahoo! Inc. (NASDAQ:YHOO).
Yahoo has begun to sell-off its overseas assets, beginning with a portion of its Alibaba stake last year. Most of the proceeds generated from the Alibaba sale have been returned to investors through a buyback program. Bullish Yahoo analysts expect the company to dump the rest of Alibaba, and eventually sell Yahoo! Inc. (NASDAQ:YHOO) Japan.
With Loeb involved, the proceeds generated from the sale of Yahoo! Inc. (NASDAQ:YHOO)’s non core assets will likely be returned to shareholders. However, Loeb has been reducing his stake. If he exits entirely, Mayer may choose to spend the money on acquisitions rather than returning capital to shareholders.
Ackman brought Johnson in to turn J.C. Penney Company, Inc. (NYSE:JCP) around
Another Ackman name, J.C. Penney has been transformed from a sleepy, ancient retailer into a battleground stock. Ackman became one of the company’s largest shareholders in October, 2010 and then brought in current CEO Ron Johnson from Apple to oversee a dramatic turnaround.
Thus far, Johnson’s turnaround strategy has floundered, and he has been forced to backtrack on some of his key initiatives, like ending the company’s practice of aggressive discounting.
Along with Ackman, Vornado Realty Trust had acquired a significant stake of J.C. Penney and had pledged to work with Ackman’s fund on the company’s turnaround. However, Vornado got cold feet last month, and sold off almost half of its stake.
For the time being, Ackman still holds his J.C. Penney stock. As long as his fund, Pershing Square, remains involved, the troubled turnaround is likely to continue. But if Ackman cuts and runs, the future of the retailer will be in doubt.
Investing in hedge fund stocks
Investors in stocks that have heavy hedge fund involvement need to stay aware of what the funds are doing.
Icahn and Ackman’s battle over Herbalife Ltd. (NYSE:HLF) should be the primary catalyst behind any move in the company’s shares, while Loeb’s decision to keep or sell his Yahoo stake could determine what the company does with its money. Meanwhile, J.C. Penney’s turnaround should continue as long as Ackman remains invested, but if he sells, things will get complicated.
The article These Stocks Are Being Ruled by Hedge Funds originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
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