Many activist investors, like Carl Icahn and Bill Ackman, are well known for taking an activist stance in their investments and producing strong returns. However, the best investors are not always perfect and following them blindly could be a bad idea. Target Corporation (NYSE: TGT) and Sears Holdings Corporation (NDAQ: SHLD) are two recent examples of how activist investors can make big bets in the wrong direction.

William Ackman’s Pershing Square Capital Management, well-known for its stand-off with McDonalds and 22% annualized returns, has built up nearly a 10% stake in Target over the past year. The famous investor is now over 50% underwater on his investment that he insists is worth $120 a share in 36 months. The problem is that much of the retailer’s value is held up in real estate, which has declined substantially in value. Moreover, consumer spending and credit have led to a much tougher environment for retailers. So, where is the catalyst for a jump in share price?

Eddie Lampert, well-known for his involvement in the Kmart bankruptcy and high-profile clients, is also deep underwater on his retailer investment – Sears Holding Corporation. The retailer recently reported weak holiday sales results, lower gross margins and forecast a profit for the fiscal year below Wall Street estimates. Many have speculated that the activist planned to sell off the company’s real estate holdings in order to unlock value, but this is no longer a possibility thanks to the struggling commercial real estate market.

So, what are they doing now? Well, Ackman announced that he is starting a new fund solely to invest in Target with the expectation that shares will reach $120 a piece in 36 months once the blood drains off the streets. Meanwhile, there is no word on what Lampert plans to do with his position and he has not announced any sales. Many are expecting him to continue holding his stake until the market turns and he is able to unload the credit card operations to unlock at least some value.

In the end, we can trace both of these failures to a drastic change in the markets that caused problems with the underlying activist strategy. Since the two already built up large stakes, it was not possible to exit the stock quickly and they were left holding the bag. It is important for investors to consider economic forecasts before investing in any company – even those held by famous activists!

Related Companies
Wal-Mart Stores, Inc. (WMT)
Costco Wholesale Corporation (COST)
Sears Holdings Corporation (SHLD)