Webcast #21: Activist Investors (5 minutes)

Companies on occasion become the target of an “activist investor”, someone that buys a chunk of stock and ruffles feathers publicly in its advocacy to realize change.

For a frustrated shareholder holding a dog, one often hopes to see a takeover or, failing that, an activist step in to serve as a catalyst to drive the price higher. More often than not, news of activist involvement accompanies an appreciation to the share price.

Last week, Elliot Investment Management LP took aim at Suncor Energy, a company whose stock price has lagged its peers by 90% over the previous three years. It criticized the oil major for having a “slow-moving, overly bureaucratic corporate culture.” Despite buying a mere 3.4% of the total company, the board and management agreed to meet with the activist and the stock jumped 9.5% in response.

Activist investing is a rare occurrence in Canada, at least publicly. In 2021, only 47 proxy contests took place challenging publicly traded Canadian companies. Globally, however, they’re far more common – particularly in the United States.

The rise of environmental, governance, and social concerns is likely to liven shareholder proposals in the future. Though overwhelmingly defeated over the weekend, Berkshire Hathaway shareholders proposed to replace its founder Warren Buffett as chair with someone that is independent from the company.

Should you follow an activist into a stock?

According to S&P Capital IQ, stocks that become an activist target outperform the market by 6% in the four weeks before and after a position was disclosed. One year later, the targets outperformed the market by 8%. Two years later, 11%. Three years in, 17%.

While activist investors create a lot of disruptive headlines, their involvement statistically serves as a historic catalyst to drive a stock price higher.