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Wall Street tends to applaud big-name activist hedge funds that buy into a poor-performing company to turn it around, but not all activist positions turn out to be ideal for shareholders, CNBC's Jim Cramer said Thursday.
"Sometimes, they reach an accommodation with management and it works. Other times they get involved in proxy fights that distract the people running the show and the trade falls apart," the "Mad Money" host said. "When it works, though, riding the coattails of the activists can be very lucrative, which is why we've spent so much time talking about these situations lately."
Activist investors such as Starboard Value, Elliott Management and Legion Partners, among others, have made plays in recent months to shake up management at a number of companies.
Cramer reviewed the top four activist stories of the year:
Cramer said Dollar Tree had a reputation as being the best run in its industry group, but its stock plunged in the wake of the company's acquisition of its worse-off competitor, Family Dollar.
He said shareholders began losing patience because the renovation of Family Dollar was taking longer than expected. Activist hedge fund Starboard Value in January bought a 2% stake in Dollar Tree in efforts to get leadership to sell the subsidiary.
Cramer saw this as a "win-win" situation: either CEO Gary Philbin's plan works out, or Starboard cleans house if it fails. In its March earnings report, Dollar Tree delivered "solid" results, including "impressive" same-store sales growth, he said.
The stock is now up more than 21% this year, and up about 12% since the "win-win" call was made, Cramer noted. It's about 2 points off of its 52-week high.
"Dollar Tree's plan is working so well that about a month ago, Starboard basically declared victory and agreed to work with management constructively rather than trying to replace the whole board of directors," Cramer said. "I think this company has more upside."
Elliott Management bought at 4% stake in eBay in late January, and Starboard Value followed soon later to take its own stake in the company. Cramer backed Elliott's urging that the e-commerce company sell off non-core businesses, such as StubHub and the classified ads, and insisted that CEO Devin Wenig work with the activists.
Come March, both entities were collaborating to unlock value, he said. EBay gave Elliott seats on its board to mollify the activists, and a major strategic review was initiated, he added.
The company beat Wall Street estimates on the top and bottom lines for the first quarter, although gross merchandise volume — an important metric for an online auction house — was down 4% year-over-year, Cramer noted.
"Still, the stock roared on the news — win-win. Plus, the whole point of Elliott's plan is to unlock the value of eBay's non-auction business," he said. "The stock's up 21% since Elliott got involved. It's up nearly 10% since I recommended it at the beginning of February. I bet, again, this one's not done going higher."
When Bristol-Myers Squibb made a move to buy Celgene for $74 billion to boost their oncology business, the stock got hammered. Starboard Value, which owned 1 million shares of the company as of late February, met with management to try and stiff-arm the deal.
After bringing Bristol-Myers CEO Giovanni Caforio on "Mad Money" to defend the controversial deal, Cramer said he thought this was a situation where the activist investors got it wrong. The CEO, he said, told a "compelling story."
Shareholders of both Bristol-Myers and Celgene would go on to approve the merger in April, and the stock has gained some steam since.
"His company's key oncology drug, Opdivo, has been crushed lately by the competition from Merck ... but with Celgene, I think they'll become the largest player in the oncological space," he said. "When Bristol-Myers reported its latest quarter, the results were better than feared. The stock has now rallied for six-straight sessions, up more than 5%. Even here, though, you know it's [selling for] 10 times earnings. Too cheap. Goes higher."
Three activist groups are laboring to reverse trends at Bed Bath & Beyond: Legion Partners, Macellum Advisors and Ancora Advisors. Cramer called the home goods chain's fundamentals "awful" and said the company wasted money buying back stocks at high prices instead of spending to fend off online competition from Amazon.
Bed Bath & Beyond gave disappointing guidance in its latest quarterly report, and CEO Steven Temares had a bold plan to moderate declines in operating margins and earnings per share, Cramer said. Last month, Cramer suggested that leadership capitulate to the activist investors.
The franchise has since formed a team to conduct a strategic review, committed to shrinking the board from 12 to 10 seats, removed five current board members and installed a new chairman, Cramer said. But the activists aren't satisfied, he added.
"They want a new CEO, and they'll do whatever it takes to make that happen," he said. "As Steven Temares is running the joint, you know what, I don't think you should own it. I like the activists' plan to turn the company around much more than management's murky thoughts about how to get things back on track."