Even if you’re familiar with event-driven investing, you may not be aware that it’s significant enough to garner it’s own hedge fund category, which holds over $590 billion assets under management, nearly a sixth of total hedge fund assets1.
That categorization belies what is actually a very simple concept: Companies that experience major “events” like changing senior leadership, new activist board members, mergers & acquisitions, or an IPO or secondary offering can drastically change the trajectory of their companies and share prices.
Whether it’s through actual improved performance and efficiency or simply increased investor interest and enthusiasm, “events” can change the fortunes of underperforming companies and lead to big turnarounds.
By looking for major company events, investors can uncover attractive ideas that other search techniques may miss.
Also, many investors, particularly mainstream mutual fund managers, avoid event-driven investing due to a lack of familiarity or a lack of confidence in their own analytical abilities. Yet, developing even a basic understanding of the dynamics involved can help all investors improve their investing skills. The best way to learn is to look at interesting event-driven stocks, like the two discussed below.
2 Turnaround Stories Fueled by “Events”
Hidden in North Dakota, Alerus Financial Corp (ALRS) is not your typical small-town bank. The company has much bigger ambitions than its $3.2 billion in banking assets may suggest. Following its rebranding to Alerus in 2000, the bank began expanding its geographic footprint into nearby Minnesota and farther-away Arizona, and added its now-sizeable retirement and benefits operations. More recently, the bank has added new states and new capabilities such that it is developing an interesting and under-the-radar franchise.
We’re impressed by its One Alerus program, which unifies its offerings onto a single technology and operating platform, allowing more effective client service, more efficient operations and clearer analysis of its business statistics. The bank is highly profitable and well capitalized. All of this seems to be missed by investors, who have put a 1.8x price/tangible book value multiple and a 13x EPS multiple on the shares. Our interest was triggered by the recent change in CEOs – long-time chief Randy Newman, who led Alerus’ impressive development, is stepping aside. The new CEO will be Katie Lorenson, the current CFO. She appears to bring considerable experience and leadership that may take Alerus to the next level. This event-driven company is worth a close look.
Coterra Energy (CTRA) is a new oil and natural gas exploration and production company, created by the recent merger of Cabot Oil & Gas and Cimarex Energy. With an $18 billion market capitalization, Coterra is large enough to capture the attention of mainstream index-plus investors, which should expand its investor base.
The company has convincingly strong assets concentrated in the Marcellus, Permian and Anadarko basins, which should produce a steady volume of oil and natural gas for years with relatively modest capital spending. The new leadership team and board of directors look capable and provides a good balance of former Cabot and former Cimarex executives – although in some mergers of equals like this one there is a risk of creating near-term disruption and longer-term lack of unity. We like the company’s public commitment to shareholders: it will keep net leverage below 1x EBITDAX, pay a newly-increased base dividend, and pay a variable dividend such that a total of 50% of quarterly free cash flow is returned to investors.
One nuance worth watching is that the company has made less of a tangible commitment to limit its capital spending, although it has outlined key self-imposed constraints. This event-driven stock has the potential to produce strong returns to shareholders, especially if commodity prices remain elevated, although the stock has moved up recently.
One More Event-Driven Success Story
Our approach includes event-driven stock turnarounds. We evaluate the prospects of the vast majority of event-driven companies, and apply our many years of specialized experience and rigorous analytical process to vet and select only the most attractive stocks.
One example is Albertsons (ACI). This major supermarket company completed its initial public offering in June 2020 at 16 a share, yet was trading at only 14.95 when we recommended it as a Buy in an August 2020 advisory. We were attracted by its new CEO, strong cash flow, reasonable balance sheet and low share valuation. After strong execution and some help from the pandemic, the shares surged to over 28, leading to our sale in September 2021 with a 94% total return.
As specialists in turnaround investing, we focus on companies that have “the right stuff,” but whose shares are currently out of favor for what we believe are temporary or fixable reasons. We often look for a catalyst that will reverse the company’s direction back toward prosperity.
Our track record, independently compiled and reported by Mark Hulbert and Hulbert Ratings, has provided our subscribers with returns that are among the best in the industry: +110% return over the past 12 months, and +12.8% annualized returns over the past 20 years (compared to the 9.5% annualized 20-year total return for the S&P 500).
- Source: eVestment, a Nasdaq company. Data as of August 31, 2021
Note: The author of this article currently owns shares of Alerus Financial (ALRS).
Do you own any event-driven stocks? Or is this the first time you’ve heard that term?