In this article, we will discuss Ken Squire’s investment philosophy and 10 activist stocks to consider for investors. Click to skip ahead to see 5 Activist Stocks To Consider For Investors.
The founder and portfolio manager of 13D Management Ken Squire has successfully topped the market indices in 2020 and extended the winning momentum so far into 2021 on the back of his strategy of creating 30 to 40 activist positions. The returns from his 13D Activist Fund (DDDIX) stood at around 27.9% net of fees in the fourth quarter compared to 27.41% for the Russell 2500. Moreover, the fund generated a 9% return since the beginning of this year. Additionally, Ken Squire’s strategy of moving towards small- and mid-cap value stocks from large-cap growth stocks benefited his hedge fund in the past two quarters. The fund manager is optimistic that value will continue to perform well in the days ahead to close the gap against growth.
“We also believe that owning value stocks with a built-in change agent, or catalyst, should provide additional alpha and that 2021 will be a very good year for activism,” Ken Squire said in a Q4 investors’ letter.
Ken Squire’s Investment Philosophy
Ken Squire believes that there are situations where activist investors’ push result in significant operational changes and stock movements. He keeps track of what he believes are the most important activist positions and initiates his bets based on those. His fund’s investment allocation process is based primarily on the analysis of the track record of the activist, sector, type of activism employed, and probability of success. Moreover, the firm also seeks to forecast what would be the activist strategy and what would be the potential returns from that strategy. The firm seeks to spread investments across many top activists with different sector expertise and strategies. The average time held for each position hovers around 15 months.
The firm seeks to generate value from operational and corporate governance activism. The portfolio manager Ken Squire is of the opinion that an activist’s position in the company often creates big price movements for stocks. 13D monitor said in a Q4 letter that 11 out of their 29 positions contain potential strategic activist catalysts. These stocks include Box Inc. (NYSE: BOX), which could be acquired by large firms like IBM (NYSE: IBM), Salesforce (NASDAQ: CRM), and Microsoft (NASDAQ: MSFT).
The firm created positions in two stocks including Elanco Animal Health (NYSE: ELAN) during the fourth quarter. Elanco is among the stocks that contain potential strategic activist catalysts. Here is what Ken Squire stated about Elanco Animal Health in an investor letter.
“This is an October 7, 2020 filing of Sachem Head (see fuller description below under new investments). This is primarily an operational and corporate governance activist agenda, but with a strategic catalyst possibility. Elanco is one of a few large, independent animal health companies and this type of company is very hard to build from scratch without brand equity and a broad portfolio. So, it could be interesting to a big pharma company that does not have an animal health business, and two years after its spinoff from Eli Lilly is enough of a waiting period for interested parties to acquire Elanco without any negative tax consequence”.
The firm has also added to its two existing positions and both of these stocks are among the 10 activist stocks to consider for investors, according to Ken Squire. On the other hand, the portfolio manager sold out two stocks in the latest quarter and reduced his stakes in 27 stocks. Ken Squire’s activist stock portfolio market value came in at $241 million at the end of the fourth quarter, up from $227 million in the previous quarter.
While Ken Squire’s reputation remains intact, the same can’t be said of the hedge fund industry as a whole, as its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 88 percentage points since March 2017. Between March 2017 and February 5th 2021 our monthly newsletter’s stock picks returned 187.5%, vs. 75.8% for the SPY. Our stock picks outperformed the market by more than 111 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Let start examining activists hedge fund tracker Ken Squire’s portfolio to find out the top 10 activist stocks to consider for investors.
Ken Squire initiated a big position in ACI Worldwide, Inc. (NASDAQ: ACIW) during the fourth quarter by purchasing 231,000 shares valued at $8.8 million. The ACIW position represented 3.67% of the overall 13F portfolio at the end of the latest quarter. Shares of ACI Worldwide jumped almost 3% since the beginning of this year, extending the twelve-month gains to 36%. It is one of the catalysts-driven stocks, according to Ken Squire. In a Q4 shareholders’ letter, the portfolio manager pointed out Starboard’s operational plan for ACI Worldwide and hinted that the company could become a target of players like FIS Global or Fiserv.
Ken Squire’s qualitatively analyzed portfolio of activism also includes The Hain Celestial Group, Inc. (NASDAQ: HAIN). 13D Management has been holding a stake in HAIN since 2017. After slower-than-expected share price performance in the last couple of years, shares of Hain Celestial rallied 96% in the last twelve months. The portfolio manager has slashed his stake in Hain Celestial Group by 32% in the latest quarter to 3.75% of the overall portfolio. Hain Celestial stock price grew 8% so far in 2021, thanks to strong financial numbers for the December quarter.
In a Q4 investors’ letter, the portfolio manager highlighted the strategic opportunities for HAIN. He said as the majority of Hain’s competitors have been acquired by larger companies, HAIN could become a good play for big companies like Pepsi, Campbell’s, Kraft, General Mills, Hormel, Kellogg, Unilever, ConAgra, etc.
Olin ranks 8th on the list of 10 activist stocks to consider for investors. 13D Management initiated a position in Olin Corporation (NYSE: OLN) during the first quarter of 2020 and slashed the stake by 43% in Q4. Despite the stake sale, Olin accounted for 3.89% of the overall 13F portfolio at the end of the latest quarter. Ken Squire’s stock-picking strategy worked in the case of Olin because shares of the chemical manufacturer rose 191% in the last twelve months.
Squire looks bullish over the future prospects of Newell Brands Inc. (NASDAQ: NWL). Despite declining the position by 30% in Q4, Newell Brands is still among the 10 activist stocks to consider for investors. Shares of NWL rallied close to 81% in the last twelve months. The company generated $2.7 billion in revenues in the latest quarter while earnings per share came in at $0.56. Newell Brands has also witnessed an increase in hedge fund interest recently.
The firm first initiated a position in Papa John’s International, Inc. (NASDAQ: PZZA) in 2019 and reduced the position by 15% to 4.05% of the overall portfolio in the fourth quarter. Still, the company ranks 6th on the list of 10 activist stocks to consider for investors. Shares of Papa John’s International soared 53% in the last twelve months. In addition, the company also offers a dividend yield of just over 1%. On the negative side, PZZA stock price is trading in the red in 2021 due to concerns over decelerating revenues. The company has generated comparable sales growth of 13.5% in North America and 21.4% from international markets during the fourth quarter.
To read the rest of the top stocks on Ken Squire’s portfolio, click 5 Activist Stocks To Consider For Investors.
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Disclosure: No position. The article 10 Activist Stocks To Consider For Investors is originally published on Insider Monkey.