Piggybacking Icahn, other activists beats market

Published Thu, May 21 201511:14 AM EDT

Buying stocks that are the targets of activists such as Carl Icahn and Bill Ackman beats the market, according to a study this week from S & P Capital IQ. The winning returns were based on buying after the activists' stakes were filed with the SEC, meaning investors don't have to get the same price as these heavy hitters to ride their coattails successfully. Assets under management by hedge funds with an activist bent swelled to $120 billion following a $30 billion inflow in 2014, according to S & P Capital IQ. Now, more than ever, you can't beat the "Barbarians," so you might as well join them. Here's how... Here's the data from the paper's authors, Frank Zhao and David Pope. "A capitalization-weighted strategy of investing in targeted firms upon the filing of a Schedule 13D and held for one month outperformed the market and the targets' control group by 2.64 percent and 1.75 percent, respectively, with significance at the 1 percent level." And the returns only get better after that ... much better. "A capitalization-weighted monthly rebalancing strategy of investing in targets by looking back 24 months to form portfolios produced an annualized outperformance of 8.16 percent after controlling for common drivers of equity returns with significance at the 1 percent level." What's even more interesting is that after two years the price appreciation starts to dwindle, but the total return is still strong because of dividends. "Two years post activism, financial characteristics of targeted firms did not show improvement but targets' total capital return yield and financial leverage were higher." This occurs when companies finally give in to the activists' gobbling up their stock and adopt the shareholder-friendly policies often advocated by those investors, the report states. Read More Street picks: 10 financial stocks ready to pop The report also delves into ways to discover activist targets before a position is announced. These stocks often have a small capitalization, low price-to-book value, recent underperformance, a below-market revenue growth rate, relatively high profit margins and lower rates of buybacks and dividends. And then the activists go to work. We "did see that targets' total capital return yield and financial leverage increased, suggesting that two of the ways that activists have historically unlocked shareholders' value were by prompting management to return additional cash in the forms of buybacks and dividends to shareholders and by lowering targets' cost of capital via additional financial leverage," stated S & P Capital IQ. The money play: The S & P Capital IQ report doesn't go into specific stocks currently targeted by activists so we turned to hedge fund database Symmetric.io for help. It has a portfolio of the favorite picks of the 15 most notable activists, including Carl Icahn, Bill Ackman and Nelson Peltz. Consumer stocks and technology firms dominate this list and that's no coincidence. Over the years, those sectors have been the ones that activists targeted most, according to S & P Capital IQ.

Carl Icahn

David Grogan | CNBC

Buying stocks that are the targets of activists such as Carl Icahn and Bill Ackman beats the market, according to a study this week from S&P Capital IQ.

The winning returns were based on buying after the activists' stakes were filed with the SEC, meaning investors don't have to get the same price as these heavy hitters to ride their coattails successfully.

Assets under management by hedge funds with an activist bent swelled to $120 billion following a $30 billion inflow in 2014, according to S&P Capital IQ.

Now, more than ever, you can't beat the "Barbarians," so you might as well join them. Here's how...