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Follow the Smart Money at a Leisurely Pace

Target companies on average underperform the S&P 500 for the first year of an activist investor’s involvement. Returns pick up in the second and third year, however.

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There may be many activist campaigns in 2023, but investors might not want to rush to piggyback on the so-called smart money.

Target companies on average underperform the S&P 500 index by 3.2% in the first year after an activist files regulatory paperwork declaring themselves as such with the Securities and Exchange Commission, according to recent data from Wolfe Research. The Wolfe team excludes the stock’s first two trading days post-filing, because most retail investors aren’t nimble enough to get in earlier.

But the stocks tend to outperform the index in the second and third year as the activist efforts are realized, Wolfe found.

“The first year of underperformance isn’t shocking to us, as effecting corporate change takes time, such as board seats, a CEO change, and operational improvement,” wrote Chris Senyek, Wolfe’s chief investment strategist in a recent note.

Still, 2023 may provide ample opportunity for investors to decide whether they want to follow activists. The first three quarters of 2022 saw roughly as many campaigns launched as during the entirety of 2021, according to Lazard data. And recent market volatility has unearthed more-attractively priced targets.

As for companies that tend to fare better with activist involvement, Wolfe highlighted undervalued large-caps with low leverage. Among those that could be prime for activist actions include
(ticker: INTC),
Take-Two Interactive Software
(TTWO), and
(MMM), according to the research firm’s screens.

Write to Carleton English at


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