Three Activists, Three Real Estate Plays, Three Stocks Popping

At an investment conference taking place in New York today, three prominent activists that we track at Insider Monkey shared their latest thoughts on stocks they like and feel are greatly undervalued. We noticed a common theme among the three companies, which are Ethan Allen Interiors Inc. (NYSE:ETH), Macy’s, Inc. (NYSE:M), and American Realty Capital Properties Inc (NASDAQ:ARCP): each of them has valuable real estate holdings that were invariably cited as being a major reason for the company’s value, which could indicate that real estate as a whole is being undervalued by the market right now, particularly when held by companies which don’t primarily operate in the real estate space.

Let’s start with Ethan Allen Interiors Inc. (NYSE:ETH), which manufactures and sells home furnishings in the US, Canada, and the United Kingdom. Activist Tom Sandell of Sandell Asset Management cited the company as his top idea, stating among other things that the company was a great takeover target owing to its large collection of real estate assets (about half of its assets), as well as its strong balance sheet. Sandell opened a position in Ethan Allen Interiors Inc. (NYSE:ETH) in the first quarter, consisting of 435,933 shares worth a little over $12 million. At the conference he claimed to be one of the largest shareholders of the company, which suggests he has greatly increased his stake since March 31. Shares are up by 5.71% today following Sandell’s remarks, and by over 13% since the end of March. Chuck Royce’s mutual fund Royce & Associates was the largest shareholder of the company in our database as of March 31, owning over 3.08 million shares.

Next up is Macy’s, Inc. (NYSE:M), which Jeffrey Smith (pictured above) of Starboard Value lauded at the same conference this morning, stating it was worth more than $125 per share, a smidge in excess of the shares’ less than $67 worth at the start of the day. They are since up by over 5% on the pronouncement from the prominent investor. Smith noted that while the shares appear fairly valued on the surface in relation to the company’s peers, there is $20 billion in real estate holdings the company owns that don’t seem to be factoring into its valuation by investors, meaning the company’s core business is trading at about 3x EBITDA. Not only that, Smith, who had no position in Macy’s, Inc. (NYSE:M) as of March 31, declared that he was ready to get involved in the company in an activist capacity and suggested its management was receptive to the idea. Macy’s was also a recent addition to the portfolio of David Einhorn, who opened a position of 1.68 million shares in the first quarter, giving him the largest holding of the company in our database as of March 31.

Lastly is American Realty Capital Properties Inc (NASDAQ:ARCP), which activist Keith Meister of Corvex Capital touted at the conference, saying he sees 25% to 50% upside in the stock, and stating that “We’re owning bond-like risk and making equity-like returns”. Corvex greatly increased his position in American Realty Capital Properties Inc (NASDAQ:ARCP) during the first quarter, by 782% to 70.64 million shares, making him by far the largest shareholder among those we track. However, even factoring in the 2.73% spurt today, shares are still trading slightly below their lowest closing level in the first quarter, suggesting Meister has not seen great returns from the bulk of his holding, and that it’s not too late for other investors to come along for the projected ride. Larry Robbins of Glenview Capital held the largest position in ARCP after Meister, totaling just under 17.17 million shares. He also greatly increased his holding, by 185%, in the first quarter.

Following activist funds like Starboard Value is important because it is a very specific and focused strategy in which the investor doesn’t have to wait for catalysts to realize gains in the holding. A fund like Sandell’s or Meister’s can simply create its own catalysts by pushing for them through negotiations with the company’s management and directors. In recent years, the average returns of activists’ hedge funds has been much higher than the returns of an average hedge fund. Furthermore, we believe do-it-yourself investors have an advantage over activist hedge fund investors because they don’t have to pay 2% of their assets and 20% of their gains every year to compensate hedge fund managers. We have found through extensive research that the top small-cap picks of hedge funds are also capable of generating high returns and built a system around this premise. In the 34 months since our small-cap strategy was launched it has returned over 139% and beaten the S&P 500 ETF (SPY) by more than 80 percentage points (read more details).

Disclosure: None