Across the globe, there are now dozens of fund managers that can put billions of dollars into play. These folks made their fortunes and reputations when their asset base was much smaller. They often targeted small, unknown companies and were able to double or even triple their money.
Yet as their asset base has grown, they can't go after small game anymore. Even if successful, a small investment can never really move the needle. So these same money managers, Warren Buffett included, are now hunting much larger prey.
Over the years, I've been tracking insider buying and noticed that the buying lists are no longer dominated by company executives but instead by these big-time fund managers that build major positions in a stock. (Once they own 5% of company stock, they must file each subsequent transaction with the SEC.)
What are these big-game hunters up to? And more important, can you make money by riding herd with them?
The answer is a qualified yes.
Carl Icahn may be considered to be one of the most aggressive practitioners of big-game hunting. He made a killing in 2008 when his $400 million in investment in biotech firm Imclone Systems turned into a $700 million stake when Bristol-Myers Squibb announced plans to buy the company.
But not every move works out. When Icahn offered to buy Clorox (NYSE: CLX) in July 2011 for $80 a share, he found little interest from the company. A few months later, he walked away.
Yet there are clear examples where you can profit by riding herd with these big investors. Here are three opportunities I'm watching...
1. Cerberus Capital
GeoEye (Nasdaq: GEOY)
This company provides satellite-imaging services to the U.S. and foreign militaries along with a range of commercial clients. Cerberus's Stephen Feinberg had built a 10% stake in the company in late 2010 while shares were in the low $40s. But questions about defense department funding have pressured this stock, though Feinberg is undeterred, acquiring shares at ever lower levels, and it now sits at just $14.50.
This stock is now at fresh 52-week lows on word that a key rival will see the bulk of 2012 funding for a key 2012 government imaging contract, known as EnhancedView.
Satellite-imaging contracts are split between rivals GeoEye and DigitalGlobe (NYSE: DGI). Late last week, GeoEye announced it would not get further near-term extensions for its part of the EnhancedView contract –but DigitalGlobe would. The outlook for 2013 and beyond is unclear, and both firms could again get funding once the current government budget impasse is resolved.
Here’s where Feinberg can make some of his investment back. Each firm has tried to buy the other to save costs and boost margins, yet both parties have rejected each other's offers. Frankly, DigitalGlobe is much larger and the more likely acquirer, and Cerberus' Feinberg is wise enough to see that. He would likely gladly unload his stake in GeoEye in the $20-25 range, even though that price range is well below his first buying efforts. He likely knows he'll never see $40 again for this stock. Still, you could wind up having much better timing than him and scoop shares up at these lower levels.
2. Neuberger Berman
OfficeMax (Nasdaq: OMX)
This investment firm just announced that it holds a 5% stake in this beleaguered office supply chain. At first blush, the appeal might stem from the fact OfficeMax is worth less than $400 million but has tangible book value of almost $500 million. Yet Neuberger has no desire to take over the company and instead just wanted enough clout to request the following:
• Seek shareholder approval before any "transformational acquisition"
• Sell of the company's Australian and New Zealand operations to raise even more capital.
Neuberger apparently believes that this stock will continue to lag if its only charm is that it is below book value. Instead, with a dividend or a big buy after those proposed asset sales could come new investor interest in this stock, which has shed more than two-thirds of its value since the start of 2011.
3. Ken Langone
Geeknet (Nasdaq: GKNT)
Langone, one of the first backers of Home Depot (NYSE: HD), is worth more than $1 billion, yet he's spending a bunch of time on this tiny $114 million (in market value) e-commerce stock. He appears to own roughly 800,000 shares, and keeps buying more with each passing month. He's Chairman, President and CEO of the company, and it will be interesting to track his next moves, now that he owns roughly $15 million of this micro-cap stock.
So what is Geeknet? The company's website, thinkgeek.com, carries a wide range of unique tech gadgets, many of which are often hot-selling gifts during the holidays. Sales in this business rose 50% in 2010, another 30% in 2011 and could rise another 15-20% this year to about $140 million. It looks like Langone is building a big position before many other investors (and potential acquirers) take notice.
Risks to Consider: Not all of these efforts pay off. Carl Icahn, for example, has been on the losing end of several proxy battles lately.
Action to Take --> The presence of a big shareholder is enough to spook a company's Board into action. Moves to boost value such as returning cash to shareholders can often be a victory for all parties concerned, and it could pay to ride along with any of these three stocks as these moves are contemplated.