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)