Last week’s 13F disclosures show that activists were buying in the midst of March’s unprecedented stock market volatility but without betting the bank.
13F Update: Activists Spent $2.6 Billion On New Positions
Primary and partial focus activists tracked in a 13F update spreadsheet prepared by Activist Insight Online spent $2.6 billion on new positions in the first quarter of 2020, the lowest amount of the previous five quarters and less than half of the outlay in Q1 2019 ($5.9 billion).
Granted, stocks were a lot cheaper this time around. The S&P 500 Index was down about 12% at the end of March, compared with a year earlier and had been down nearly 19%. And activists did take more new positions – 123, compared with between 83 and 96 in each of the first three quarters of 2019 (in Q4, the number ticked up to 101).
But more than anything, activists fell back on what they already knew. The number of increased positions – 207 – was also higher than in any of the previous four quarters, albeit by not as great a margin. Some of those new positions were re-entries, such as Starbucks for Pershing Square Capital Management or Chef’s Warehouse for Legion Partners.
Some activists are clearly enjoying the fruits of the stock market’s recovery. Pershing Square, the subject of our activist profile in the May issue of Activist Insight Monthly, is now up 21% year-to-date and Legion had to trim some of its Chef’s Warehouse position when it rapidly appreciated from its lows.
Some bets look safe. Technology represented the largest sector by amount invested, at over $500 million. Corvex Management, the most active in turning over its portfolio according to our data, rolled into names like dating platform Match Group and Netflix. But consumer cyclical and financial services, which could be hit hard by a slowdown in economic activity, were also surprisingly highly favored.
At least investors avoided a sector that is obviously going to endure a tough 2020. There were only four new investments in energy companies.
Driver Management’s Campaign At First United
Activism in closely regulated industries has been a niche but increasingly frequent feature of the last few years – a welcome development for writers since these campaigns are rarely without late twists. This week, Driver Management’s campaign at Maryland bank First United was thrown into turmoil when the state’s commissioner of financial regulation effectively recommended that the solicitation be halted. Although he left the decision to others, First United pressed ahead on Wednesday by seeking a declaratory judgment that would kill the contest. Driver has called foul, sharing correspondence that the activist called evidence that its target’s lawyers begged the regulator to intervene, but which the bank called “select, out-of-context excerpts.”
Such efforts are not uncommon – HomeStreet and Argo Group International both received relief from activist campaigns at the hands of regulators, though their comfort was short-lived as both faced renewed pushes at the next opportunity. HomeStreet fared well enough, winning a valid contest over Blue Lion Capital. At Argo, a bigger regulator came along in the form of a Securities and Exchange Commission investigation into CEO Mark Watson. He is now long gone and its antagonist, Voce Capital Management, had a say in three new board members. But at First United, Driver could lose its shareholder rights for five years. Second chances come less easily in Maryland.
Quote Of The Week
Quote of the week comes from Chris Kiper at Legion Partners, quoted in the May 2020 issue of Activist Insight Monthly on the surge in corporate profitability following the 2008 downturn as management teams learned to incorporate efficiency tools, and what it might mean for 2021:
“In a scenario where you have an activist on your roster you are going to see a lot more discussions around how do we become more efficient and how do we boost margins and come out of this stronger than we were before,” said Kiper.