Special-Situation Central: Activist Investor Activity in Colgate, Crown Holdings, and PayPal

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Happy Monday. I hope you had a safe, relaxing, and enjoyable Thanksgiving weekend.

To start the week off, we’re bringing you the newest issue of Special-Situation Central.

When we launched Special-Situation Central in August, we shared that some of the situations we would track and analyze included takeover plays, breakups and spin-offs, stock splits, share buybacks, recapitalizations, activist targets, and more.

Wall Street pros refer to these as “special-situation” investments.

And they’re everywhere.

Today, the team is going to share some activist targets.

These are companies that large investors take a meaningful stake in because they believe that the company could be run better, and that with better performance, increased shareholder value will follow.

There are three companies we are going to look at today that have received investments from activists:

• Colgate-Palmolive Co. (CL)
• Crown Holdings Inc. (CCK)
• PayPal Holdings Inc. (PYPL)

Now, all of these companies are in our Red Zone, meaning our Health Indicator has determined that they are in an unhealthy state.

But activist investors don’t invest in companies to lose money.

And whether through gentle prodding or blunt criticism, activist investors try to do one thing: make their shares worth more than what they paid for them.

So, while these stocks are in the Red Zone now, it’s worth putting them on your radar and following along to see if these activists’ suggestions start working.

Because then, when you see a TradeSmith Early Entry Signal on one of them, you’ll be ready to pounce if you so choose.

I’ll let the team take it away from here.

Enjoy your Monday – Keith Kaplan, CEO, TradeSmith

Activist Target No. 1: Colgate-Palmolive Co. (CL)

Activist investor Dan Loeb’s hedge fund, Third Point Management, has taken a reported $1 billion stake in Colgate.

Loeb is known for letter-writing campaigns that critique management teams. After revealing a significant stake in Walt Disney Co. (DIS) this August, he wrote a letter to Disney CEO Bob Chapek about five initiatives Chapek should consider, one of which was to spin off ESPN into its own company.

Loeb’s interest in Colgate is not in the oral care or house cleaning products the company is best known for, however. Rather, he sees potential in its pet food business.

Colgate’s pet-nutrition division brought in $909 million in Q2 2022, a 5.3% increase from the previous year.

To keep expanding, Colgate plans to purchase three U.S. dry pet food manufacturing plants from Red Collar Pet Foods for $700 million. Colgate is also building a new food manufacturing facility in Kansas, and in April it completed the acquisition of a canned pet food facility in Italy.

Loeb believes that if the pet food business were spun off from Colgate, it would have a valuation of $20 billion.

A study from Deloitte and Edge Consulting Group found that between 2000 and 2014, spinoff stocks generated a 22% return within the first 12 months of trading.

That’s even better than the 14% return of the parent company that performed the spinoff. It’s also important to keep in mind that the dot-com bubble and Great Recession both took place between 2000 and 2014, so even in tough conditions, spinoff stocks have generally performed well during their first year of trading.

If Colgate were to follow Loeb’s advice and spin off the pet division, the data shows it could be a profit opportunity.

CL stock is down 8.78% this year as of this writing and has a medium-risk VQ of 16.21%.

Activist Target No. 2: Crown Holdings Inc. (CCK)

Carl Icahn has been an activist investor for decades, and he’s known for trying to force companies to make changes that can range from management shakeups to overhauls of entire business processes.

His most recent target is Crown Holdings, one of the world’s largest manufacturers of beverage and food cans, with 200 factories in 40 countries.

Icahn reportedly wants the company to increase its share buybacks and sell off noncore businesses.

Crown bought a company five years ago that makes packaging used for transporting goods, and it also has a business unit that makes aerosol cans.

Both of those could be candidates to be sold.

CCK stock is down 26.63% this year as of this writing and has a medium-risk VQ of 26.08%.

Activist Target No. 3: PayPal Holdings Inc. (PYPL)

Founded by Paul Singer, Elliott Investment Management is known as a pit bull in the activist investing world.

It took on the entire country of Argentina after it defaulted on its sovereign debt and Elliott owned its bonds, detaining an Argentinian naval vessel as a pressure tactic. In August, PayPal announced that Elliott Management had a $2 billion stake in PYPL.

During that same time, PayPal also announced that it had brought in a new chief financial officer and that it would roll out a $15 billion share repurchasing plan.

PayPal is also planning an investor day in early 2023 to share operational, capital allocation, and strategic updates.

This could be more for Elliott Investment Management than shareholders so that PayPal can show it is being active in making changes. Still, if it has a plan on how to improve operations, spend capital more wisely, and make better strategic decisions, it will ultimately benefit shareholders.

PYPL stock is down nearly 60% this year as of this writing and has a high-risk VQ of 36.53%.