We recently compiled a list of the Shake-Up Alert: 40 Companies Facing Activist Pressure.In this article, we are going to take a look at where Algonquin Power & Utilities Corp. (NYSE:AQN) stands against the other companies facing activist pressure.
The equity market has been on a roll, rallying by 10% in the first half of 2024, adding to the 24% gain registered in 2024. Amid the gains, one would be mistaken to think activist investors would go slowly, given the bumper returns on offer. That is not the case, given that activist investors are becoming more active and bold in a push to squeeze optimum value in the equity markets.
It was arguably one of the busiest years for activist investors as they launched 1,151 campaigns in 2023, up from 1,083 campaigns recorded in 2022. Since 82% of the campaigns revolved around environmental, social, and governance issues, ESG affirms a new wave of activism in the equity markets.
In addition, there was a 7% jump in new activist investor campaigns in 2023 to 252, setting a new record. Likewise, there were 77 first-time activist-initiated campaigns in 2023, up from 55 in 2022, according to data by Lazard. Some of the most targeted sectors with activist campaigns were industrials at 21%, followed by technology at 20% and healthcare at 20%. Consumer and financial sectors accounted for 11% and 8% of the activist campaigns, respectively.
Activist investors can be individuals or institutions that acquire a controlling stake in a target company. With the investment, they gain the much-needed power to push for strategic changes that can unlock hidden value in a company they believe is underperforming. A push for seats on the board is one of the strategies deployed as one way of influencing decision-making and advocating for management changes.
In aggressive cases, activist investors can push for the sale of the entire business or some part of the business to generate shareholder value. Some activist campaigns also involve pushing for restructuring, such as cutting costs to bolster margins.
A push to sell the entire business or split some units were some of the favorite actions pushed by activist investors, in 49% of the activist campaigns last year. Additionally, the activist investors pushed for a change of leadership, with some advocating for streamlining operations through cost cuts to improve margins. Activist investors pushed for management changes in 10% of the campaigns initiated last year following a 46% year-on-year increase in 2022.
Elliot Management, Starboard Value, Trian Partners, and Third Point were some of the top US activist investors at the center of most corporate wars. US activist investors accounted for 14% of the total activist campaigns last year, affirming their influence in pushing for value in various companies. Likewise, ValueAct posted a 39% gain through its campaigns as Caligan Partners rose 37% and Engaged Capital returned 29%. Pershing Square Holdings, spearheaded by activist Bill Ackman, generated a 27% gain.
Activist investors fared much better in 2023 thanks to the rising stock market that shrugged off the high interest rates that had been increased to 22-year highs of 5.25% to 5.50%. Similarly, activist hedge funds also deserve some credit for focusing on market-beating stocks that did much better amid an uncertain market environment. In the end, activist investors enjoyed one of their best years in the recent past, with an average return of 20.2% in 2023. The gains came after the strops had lost an average of 16% in 2022
Activist investors showed no signs of slowing in the first half of 2024, going by 147 new campaigns, surpassing the 2018 record of 143. In the second quarter of 2024, 86 new activist campaigns were recorded, barely a year after a strong rebound.
The heightened activist investor pressure came amid concerns that factors like high interest rates and slowing growth would hurt the company's performance. Amid a surge in activist investor campaigns in 2024, the success rates of most of the campaigns have dropped significantly. For instance, most of the campaigns in the first half only won 74 board seats, down from 93 as of last year. It is also a concern that activists only secured 11% of their sought-after board seats compared to a 65% win ratio in 2023. The significant decline in success rates affirms that companies are becoming more effective in fending off activist pressure.
Investors are already pushing companies harder for change in 2024, concerned by the impact of soaring geopolitical instability and economic uncertainty. Creating a lower and stable interest rate environment is expected to create more opportunities for activist investors to capitalize. Given that nearly half of the campaigns in 2023 involved a merger and acquisition objective, it is expected to be the case in 2024, especially with the Federal Reserve cutting interest rates.
Reports show that there could be more than $2 trillion in capital set for acquisitions in 2024, and more activist investors are expected to demand companies review their business portfolios. Part of the proposals that activist investors are likely to push for is the divestment of some units or the sale of the entire company.
Even though activist investing is evolving significantly with a renewed focus on industrial investment plays, technology companies are expected to dominate most campaigns in 2024. Nevertheless, the broader situation, including unpredictable interest rates, political instability, and the forthcoming US presidential race, adds complexity, making it harder and longer for activist efforts to succeed.
Our Methodology
Activist campaigns are growing as activist investors look to unlock hidden value in stocks trading below their fair value. Upon sifting through numerous media reports and scanning the Insider Monkey hedge fund database, we came up with the 40 companies facing activist pressure. The stocks are ranked based on the number of hedge funds that own them, as of Q1 2024.
Note: The returns are calculated from the investment date to August 1, 2024.
We also mentioned the number of hedge funds that had bought these stocks during the same filing period. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter's strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An engineer in a control room monitoring a massive system, demonstrating the capabilities of rate-regulated utilities.
Starboard Value at Algonquin Power & Utilities Corp. (NYSE:AQN)
Stock Return: -25.89%
S&P 500 Return: 36.21%
Investment date: 29/06/2023
Number of hedge funds holding stakes: 33
Algonquin Power & Utilities Corp. (NYSE:AQN) is a clean energy and utility firm that offers solutions and services for energy and water across North America and around the globe. The regulated services division delivers services subject to rate regulation for water, electricity, and gas utilities. The renewable energy division produces and markets power from its collection of renewable energy facilities.
Activist investor Starboard, which owns a 9% stake in Algonquin Power & Utilities Corp. (NYSE:AQN), has been pushing for strategic changes to unlock additional value. The hedge fund has already secured three seats on the board. The hedge fund has also succeeded in pushing for the transition of the CEO and a strategic review of the renewable energy unit.
Algonquin Power & Utilities Corp. (NYSE:AQN) is down by about 3.25% year to date. On the other hand, hedge funds holding stakes in the company out of the 920 tracked by Insider Monkey increased to 33 in Q1 2024 from 29 in Q4 2023.
Overall AQN ranks 24th on our list of the companies facing activist pressure. While we acknowledge the potential of AQN as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AQN and that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.