Three Stocks with Tremendous Upside from Activist Investors

John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

How is the mindset of a billionaire different from a Motley Fool reader? You might be surprised to learn that it’s not that different, actually.

T. Boone Pickens recently published an op-ed piece on LinkedIn Today called A Fool and His Money are Soon Parted. The first sentence of the piece reads, “Don't think that just because I'm a billionaire I throw money away.”

I’ve personally seen T. Boone make investments as small as $500,000 (readers may question this, but I actually have). When you consider a half million dollars in relation to his net worth, it’s similar to any of us making a small trade in our retail brokerage account.

T. Boone Pickens isn’t the only billionaire who exercises discipline with his money. Consider the case of Carl Icahn and his large investment in Herbalife. I recently wrote how Icahn prudently accumulated his Herbalife shares in the mid $20-range and $30-range. We can confirm that Mr. Icahn hasn’t purchased any shares above $40 through his regulatory filings, yet retail investors have piled in at significantly higher prices than Icahn paid himself.

The purpose of these illustrations isn’t because I have a preference for T. Boone Pickens or Carl Icahn with Herbalife (in fact, I actually agree with Ackman).  The lesson here is simple--despite their tremendous wealth, most of the large investors in the stock market continue to make the most money because they follow a strict set of rules. While T. Boone and Icahn have made countless investments over the years, these sharks continue to prowl the seas of the stock market.

I believe Motley Fool readers can participate in the upside by swimming with the sharks. Here are three stocks that are currently being stirred by activist investors.

Famous Dave’s of America (NASDAQ: DAVE)

Famous Dave’s is a full sit-down restaurant that specializes in barbequed meats and chicken, including beans, corn muffins and sauces. The company owns 53 locations and franchises an additional 134 restaurants in 34 states and 1 Canadian province.

On Feb. 13, Dave’s reported fourth quarter revenue of $36.3 million, which was less than the expected $37.3 million. Comparable restaurant sales for October - December decreased 6.0% for company-owned restaurants and 4.0% on franchised restaurants.

A quick lesson on same-store sales. During my work as an equity research analyst, I evidenced that franchised restaurants consistently performed better than company-owned restaurants. The reason is simple: franchisees have more skin in the game. Therefore, it doesn’t surprise me that Dave’s franchised restaurants outperformed the company-owned by a full 2.00%.

The weak performance at Famous Dave’s presents a prime opportunity for an activist investor. Patrick Walsh, a Chicago-based wealth manager, recently purchased 9.9% of Famous Dave’s, which has a market capitalization of $77 million.

On March 4, Famous Dave’s disclosed with the SEC that it agreed to add Patrick Walsh to the company’s board of directors.  In addition to having a new board member, Famous Dave’s announced back in December it was re-aligning its core marketing functions.

I recommend buying shares on this collective news.

Hess Corp. (NYSE: HES)

Hess is a $24 billion global energy company that operates in two segments: Exploration & Production (E&P) and Marketing and Refining (M&R).

On March 4, Hess announced in a press release the company’s formal plans to transform into solely an exploration and production business and exit the downstream businesses of retail, energy marketing, and energy trading.

While John Hess, Chairman and CEO, told news outlets that the changes were prompted by internal review, numerous analysts believe that activist investors such as Paul Singer’s Elliot Management prompted the news.

Mr. Singer recently stated that the company is “doing the least possible to maintain the status quo.” I believe we will see more to come from Hess management as shareholders prod behind the scenes.

Following the series of announcements, multiple firms on Wall Street have raised their price targets on Hess. French investment firm Societe Generale upgraded Hess to Buy from Hold with an $80 price target. New York-based ISI Group also upgraded the stock to Buy with a $77 price target.

Despite the recent run in share price, I believe Hess has more upside over the next 12 months for several reasons. First, the company announced a dividend increase and share repurchase plan that benefits a higher share price. Second, annual production growth is estimated at 5% to 8% through 2017, and capital expenditures will decrease by 17% in 2013.

Navistar (NYSE: NAV)

Navistar is a $2 billion trucking manufacturer headquartered in Illinois. The company manufactures commercial and military trucks, as well as branded and private label diesel engines.

Shares of Navistar have fallen from a high of $70 during 2011 and currently exchange hands in the mid $20-range. Hedge fund investors Mark Rachesky and Carl Icahn both own at least 12 million shares of Navistar.

Interestingly, Rachesky worked for Icahn for 6 years. He subsequently left Icahn and started his own hedge fund, MHR Fund Management, named with his initials. During 2010, Rachesky actually beat out his former mentor Icahn in a profligate legal battle over Lion’s Gate Entertainment, the film entertainment company. Now, Icahn and Rachesky are on the same side of the table, working to improve the corporate management at Navistar.

In February, Icahn reported an increased stake in Navistar, in addition to Chesapeake Energy, Netflix, and Take-Two Interactive.

Shares of Navistar have fallen over the last 2 years as the company lost market share to competitors Paccar and German brand Daimler AG. The CEO of Navistar recently stated he expects his company to regain share as the company introduces its revamped engines. Market share at the end of January had fallen to 16.5% from a previous 21% during 2011.

Foolish Bottom Line

Often times, corporate objectives do not coincide with shareholder interests, as we’ve seen with the board of directors at Apple being deaf to shareholders with its hoards of cash. Apple has refused to issue preferred stock with a higher dividend yield or institute a share buyback plan. CEO Tim Cook even went as far to say that he considered the recent investor lawsuit to be “silly.”

In contrast to Apple, retail investors have an advocate in Famous Dave’s of America, Hess Corp, and Navistar. Furthermore, Motley Fool readers can own identical shares and benefit equally while heavyweight investors such as Icahn, Rachesky, Singer, and Walsh pursue our common goals.

Thanks for reading, and consider subscribing to my posts for more Fool ideas on outperforming the market.

johnmacris has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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