We recently published a list of Restructuring alarm: 40 companies are under pressure from activists. In this article, we take a look at where Southwest Airlines Co. (NYSE:LUV) stands compared to other companies facing pressure from activists.
The stock market is on a roll, gaining 10% in the first half of 2024, adding to the 24% gain seen in 2024. Given these gains, it would be a mistake to think that activist investors would move slowly given the record returns on offer. However, that is not the case, as activist investors are becoming more active and bolder in their efforts to extract the most value from the stock markets.
It was arguably one of the busiest years for activist investors, as they launched 1,151 campaigns in 2023, compared to 1,083 campaigns in 2022. With 82% of campaigns revolving around environmental, social and governance issues, ESG confirms a new wave of activism in equity markets.
In addition, there was a 7% increase in new activist investor campaigns in 2023, to 252, which is a new record. Likewise, there were 77 campaigns initiated by activists for the first time in 2023, up from 55 in 2022, according to data from Lazard. The sectors most affected by activist campaigns included industrials at 21%, followed by technology at 20% and healthcare at 20%. The consumer and financial sectors accounted for 11% and 8% of activist campaigns, respectively.
Activist investors can be individuals or institutions who acquire a controlling stake in a target company. With the investment, they gain much-needed power to drive strategic changes that can unlock hidden value in a company they believe is underperforming. Seeking seats on the board is one of the strategies that can be used to influence decisions and seek management changes.
In aggressive cases, activist investors may push for the sale of all or part of the company to increase value for shareholders. Some activist campaigns also push for restructuring, such as cost cutting to increase margins.
Selling the entire company or splitting up some business units were among the most popular actions among activist investors, featuring in 49% of activist campaigns last year. In addition, activist investors pushed for leadership changes, with some advocating for streamlining operations by cutting costs to improve margins. Activist investors pushed for management changes in 10% of campaigns initiated last year, following a 46% year-over-year increase in 2022.
Elliot Management, Starboard Value, Trian Partners and Third Point were among the leading US activist investors at the center of most corporate wars. US activist investors were involved in 14% of all activist campaigns last year, affirming their influence in increasing the value of various companies. Similarly, ValueAct saw a 39% gain from its campaigns, while Caligan Partners gained 37% and Engaged Capital gained 29%. Pershing Square Holdings, led by activist Bill Ackman, achieved a 27% gain.
Activist investors fared well in 2023 thanks to a rising stock market that pushed up high interest rates to 22-year highs of 5.25% to 5.50%. Likewise, activist hedge funds deserve credit for focusing on strong stocks that performed significantly better in an uncertain market environment. In the end, activist investors enjoyed one of their best years in recent memory, with an average return of 20.2% in 2023. The gains came after investors lost an average of 16% in 2022.
In the first half of 2024, activist investors showed no signs of slowing down, launching 147 new campaigns, beating the record of 143 set in 2018. In the second quarter of 2024, 86 new activist campaigns were registered, barely a year after a strong recovery.
The increased pressure from activist investors came amid concerns that factors such as high interest rates and slowing growth would hurt company performance. While there has been a rise in activist investor campaigns in 2024, the success rates of most campaigns have dropped significantly, with most campaigns winning just 74 board seats in the first half of the year, compared to 93 last year. It is also concerning that activists won just 11% of their coveted board seats, compared to a 65% win rate in 2023. The significant drop in success rates confirms that companies are becoming increasingly effective at fending off activist pressure.
Investors are already pushing companies harder to make changes in 2024, concerned about the impact of rising geopolitical instability and economic uncertainty. The creation of a lower and stable interest rate environment should create more opportunities for activist investors to capitalize. Given that nearly half of the campaigns in 2023 had merger and acquisition targets, it is reasonable to expect this to be the case in 2024 as well, especially given the Federal Reserve’s rate cuts.
Reports suggest that over $2 trillion in capital could be available for acquisitions in 2024, and more activist investors are expected to demand that companies review their business portfolios. Proposals that activist investors are likely to push through include divesting some business units or selling the entire company.
Even though activist investing is evolving significantly and the focus is returning to industrial investments, technology companies are expected to dominate most campaigns in 2024. However, the broader situation, which includes unpredictable interest rates, political instability and the upcoming US presidential election campaign, makes things even more complex and difficult for activist efforts to succeed.
Our methodology
Activist campaigns are on the rise as activist investors seek to unlock hidden value in stocks trading below their fair value. After reviewing numerous media reports and sifting through Insider Monkey’s hedge fund database, we’ve come up with the 40 companies under pressure from activists. Stocks are ranked based on the number of hedge funds that own them (as of Q1 2024).
Note: Returns are calculated from the investment date through August 1, 2024.
We also mentioned the number of hedge funds that bought those stocks during the same reporting period. Why do we care about the stocks hedge funds invest in? The reason is simple: Our research has shown that we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (read more details here).
A commercial Boeing 737 aircraft with the well-known SWABIZ logo flies in the sky.
Elliot Management at Southwest Airlines Co. (NYSE:LOVE)
Shareholder return: -3.7%
S&P 500 return: -0.7%
Investment date: 09.06.2024
Number of hedge funds holding shares: 33
Southwest Airlines Co. (NYSE:LUV) is one of the largest companies in the world, providing scheduled airline services around the globe. The company has been under pressure recently, with its stock price falling sharply over the past four years due to declining profit margins.
Elliott Investment Management has since amassed significant stakes and is pushing for strategic changes to reignite growth. The activist investor is calling for the ouster of current CEO Bob Jordan and chairman Gary Kelly. The hedge fund is also demanding a business review.
Southwest Airlines Co. (NYSE:LUV) has taken steps to protect its interests. The airline has implemented a strategy called a “poison pill,” which goes into effect when a shareholder gains a stake of over 12.5%, limiting Elliott’s ability to gain further influence.
According to the Insider Monkey Database, the stock is down 7.14% year to date, with the number of hedge funds holding shares in Southwest Airlines Co. (NYSE:LUV) increasing from 27 to 33 by the end of 2023.
Total LUV Place 25 on our list of companies under pressure from activists. While we recognize LUV’s potential as an investment, we believe AI stocks promise higher returns and do so in a shorter time frame. If you’re looking for an AI stock that’s more promising than LUV and trades at less than 5x earnings, read our report on the cheapest AI stock.
READ MORE: Analyst sees a new $25 billion “opportunity” for NVIDIA And According to Jim Cramer, NVIDIA has “become a wasteland”.
Disclosure: None. This article was originally published on Insider Monkey.
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