A combination of poorly performing stocks and an ongoing focus by activist investors on corporate governance suggests that 2022 will be ripe for corporate battles between management and significant shareholders.
At least, that’s according to a recent article on stocks from Fortune and Cox School of Business finance professor Shane Goodwin.
“Hedge fund activists like Bill Ackman or Carl Icahn are going to be focused on companies that are ‘clearly underperforming’ and ‘maybe there’s an opportunity within the industry for sale,’” Godwin says. “In fact, any companies that are underperforming, ‘whether they were just newly [public], or whether they’ve been public for a very long time, are definitely going to be in the crosshairs.”
Godwin says that these stocks, new or old, will be targeted by activist investors in the year ahead if their stocks haven’t been performing.
I’m particularly interested in the consumer discretionary sector, so I’ve put together a list of seven stocks that are currently in the crosshairs of investors. Some are buys. Others are not. I’ll tell you which are which.
- Harley-Davidson (NYSE:HOG)
- Dollar Tree (NASDAQ:DLTR)
- TreeHouse Foods (NYSE:THS)
- Cracker Barrel Old Country Store (NASDAQ:CBRL)
- GoDaddy (NYSE:GDDY)
- Kohl’s (NYSE:KSS)
- Peloton Interactive (NASDAQ:PTON)
Stocks Activists Are Circling: Harley-Davidson (HOG)
When you’re an activist investor, sometimes you have to rattle a few cages. That’s what New York City-based H Partners Management has done with the iconic motorcycle brand.
The investment firm first bought 3.5 million Harley shares in Q2 2020. It has since added to its position. In February 2021, it reported it owned 4.2 million additional shares of HOG. That made it the fifth-largest shareholder. By the end of September 2021, it raised its ownership stake to 11.2 million shares. By the end of the year it owned 12.3 million shares, good for 8% of the company.
Right around Christmas, it notified the company that it wanted a seat on Harley’s board. While it didn’t have a problem with Harley’s strategic direction, it did have issues with the company’s corporate governance and executive compensation.
On Feb. 3, Harley-Davidson gave H Partners its wish.
The two parties agreed to cooperate moving forward. As part of this agreement, Jared Dourdeville, a partner at H Partners, is joining the company’s board and will serve on both its human resources committee and the nominating and corporate governance committee.
“Under the leadership of Jochen Zeitz, we believe Harley-Davidson’s best days are ahead, and we look forward to partnering with the Board, leadership team, and employees to reinvigorate this iconic American company,” Dourdeville said in the joint press release.
Harley Davidson stock is up 15% over the past 52 weeks,. In 2020, Zeitz earned $9.4 million in total compensation. That was 57x the median employee’s total compensation of $166,164.
Dollar Tree (DLTR)
Like a lot of activist activity, it all starts rather innocently. A few shares here, a few shares there, and the next thing you know, they’ve got a major stake in the company and are looking for changes.
In November, New York City investment manager Mantle Ridge was reportedly putting together potential investors for a special purpose acquisition company (SPAC) that could then build a stake in Dollar Tree. Mantle Ridge was started by former Pershing Square partner Paul Hilal. It isn’t alone in its desire to make changes to the discount retailer.
In 2019, Starboard Value wanted the company to spin off its Family Dollar banner. It also started a proxy fight to appoint its own slate of board members but eventually dropped the idea.
In December, Mantle Ridge went down the Starboard path by nominating its own slate of directors to replace the current board members. Hilal would like to see Richard Dreiling, the CEO of Dollar General (NYSE:DG) from 2008 to 2015, hired by Dollar Tree.
Mantle Ridge’s $1.8-billion stake is good for 9.9% of the company. Analysts see Dreiling’s hiring as a major positive for DLTR stock. Given Mantle Ridge tends to work on one company at a time and replaced CEOs of target companies in the past, shareholders should expect a continued push to appoint Dreiling to the top job.
TreeHouse Foods (THS)
Jana Partners, a New York hedge fund, owns 9.4% of the food and beverage company. At the end of December, Bloomberg reported that Jana would appoint two directors to the company’s board.
Jana originally invested in Treehouse in February 2021. It convinced the company to undertake a strategic review with the possibility of an outright sale. In March, Jana and Treehouse announced an agreement that would see Jana appoint two independent directors to the company’s board.
However, the standstill and voting commitments from the agreement expired in December, which is why Jana is now going after two more board seats.
In November, Treehouse announced that it would explore strategic alternatives such as an outright sale or the divestiture of its meal prep business. It has retained financial and legal advisors for this process.
Over the past year, THS stock has lost 17%; stocks in the S&P 500 are up 13%. While its share price rallied after its November announcement, it has since fallen back to where it traded before it said it would explore alternatives.
You can bet that either Jana gets more people on Treehouse’s board or it finds a buyer.
Stocks Activists Are Circling: Cracker Barrel Old Country Store (CBRL)
In one of the longest-running feuds in corporate America, Biglari Holdings (NYSE:BH, NYSE:BH.A) sent a letter to Cracker Barrel shareholders in December that laid out the holding company’s current concerns with the strategic direction of the restaurant and retail chain.
However, as recently as September 2014, Biglari owned 19.8% of Cracker Barrel’s shares. Back then, activist investor Sardar Biglari tried unsuccessfully on three occasions to join its board. That was after he unsuccessfully tried to get the company to pay a $20 special dividend – it would have cost the company $475 million and doubled its debt – and put itself up for sale.
Like a bad stench, the board told him to get lost. But he’s back.
“It has become increasingly clear that management lacks a credible strategy with which to create value in the present business climate, and that the Board, which primarily consists of directors with minimal relevant experience in the casual dining space, is unable to provide the necessary oversight. Management’s waning credibility is reflected in the Company’s stock performance,” Biglari stated in his Dec. 14, 2021 letter to shareholders.
Speaking of stock performance, over the past two years, Biglari’s stock generated lost 23% over the last five years, while CBRL stock is up 3% over the same period.
I actually wrote about Biglari back in 2013. He’d been on Cracker Barrel’s case since 2011. That’s a decade ago.
The man needs to get a hobby.
Starboard Value acquired a 6.5% stake in the web services firm in late December. Starboard paid $800 million or an average of $70.64 a share.
According to CNBC, in the 45 times the hedge fund has taken an activist position in a company, it’s delivered a 42.25% return, 2.4x the S&P 500.
There are three moves the hedge fund could push for at GoDaddy.
The first is to get a seat on its board. It can nominate its own choices until March 4. Investors should expect a press release any day announcing its own nominations.
Secondly, Starboard can work with GoDaddy on an operational plan that better balances growth with profits. Its earnings before interest, taxes, depreciation and amortization (EBITDA) are about half those of its peers.
Lastly, in combination with installing operational efficiencies, GoDaddy can buy back its shares. The company’s trailing 12-month free cash flow (FCF) is $550 million. Starboard would likely want an FCF margin of at least 20%, one-third higher than what they currently are.
Over the past three years, GoDaddy’s total return was 10%, about half the return of the entire U.S. market.
In 2018, I included Kohl’s CEO Michelle Gass on a list of seven women-led companies delivering for shareholders. She’d only been in the top job for six months at the time. However, having joined the company in 2013, and was appointed as CEO-elect in October 2017, I felt like she’d made a large contribution to the company over the years and deserved the promotion.
Since becoming CEO-elect, Gass has been working to implement a business strategy to help the budget department store thrive and prosper. Despite partnerships with Amazon (NASDAQ:AMZN) and Sephora, it hasn’t been easy due to Covid-19 and the consumer’s move t0 e-commerce purchases.
It also hasn’t helped that she’s had activist investors nipping at her heels as she’s worked to make the business more competitive.
In early December, Engine Capital LP, which owns about 1% of the company, pushed for the company to sell itself or spin off its e-commerce operations. Engine Capital believes the business is worth $75 a share – it currently trades around $59.
Macellum Advisors, which owns 5%, have requested at least one seat on its board, and it would like the company to undertake a strategic review. That’s often code for putting up the for sale sign.
Lastly, Starboard Value has apparently offered $64 a share for the company, about an 8% premium based on current prices. Kohl’s has been tightlipped about any of the activist investors’ demands.
With three activists circling, it’s clear KSS stock is worth more than $59 a share. How much more? We’ll soon find out.
Stocks Activists Are Circling: Peloton Interactive (PTON)
The company’s products were all the rage during the pandemic. Now that the world is moving to a more normal routine, sales have fallen, and with it its share price. PTON is down 33% in the past three months alone. It now trades just a few dollars above its September 2019 IPO price of $29.
I’m not surprised that Peloton’s shares have gone in the toilet. The fitness equipment market has relatively low margins and a consumer base that is very fickle. I said as much in May 2020. It’s a tough business to consistently grow sales and profits.
In January, activist investor Blackwells Capital wrote an open letter to Peloton’s board. The New York-based alternative asset manager suggested that the board fire then-CEO John Foley and consider selling the business to a strategic buyer.
“Remarkably, the Company is on worse footing today than it was prior to the pandemic, with high fixed costs, excessive inventory, a listless strategy, dispirited employees and thousands of disgruntled shareholders. And no wonder, the latter, given that Peloton underperformed every other company in the Nasdaq 100 over the last twelve months,” stated Blackwells Capital Chief Investment Officer Jason Aintabi.
Now, Peloton faces a patent infringement lawsuit from iFit Health & Fitness Inc., the maker of Nordic Track home-fitness equipment.
I don’t always agree with activist investors and their tactics, but in this case, Blackwells Capital was right on the money. On Feb. 8, Foley stepped aside as CEO and the company announced it was cutting 2,800 jobs.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.