Even today, investors are still filing 13D forms with the SEC, documents that convey a greater than 5% ownership stake in a business. While owning 5% of a company is no guarantee that the owning shareholder is planning any proposals, many investors won't take such positions without high conviction that a value creating opportunity exists. Therefore, scanning through such filings can be a fertile source of investment ideas. (For a quick refresher on this topic, check out Digging Into 13D Disclosures.)
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The most recent issue of Barron's revealed some intriguing small cap names that are the sole source of recent investor activism. Investment firm Discovery Equity Partners now owns 5.9% of CardioNet (Nasdaq:BEAT), a provider of outpatient management solutions pertaining to cardiac health data in individuals. The company's products focus on the monitoring of heart beat disorders. It's monitoring services and devices keep a constant vigil on the cardiac health of patients needing monitoring. Discovery paid $6 a share for its stake, versus $7 today, so they have already made a tidy return. But investors shouldn't turn away just yet. Although the company is currently unprofitable, the balance sheet is debt free, and over $2 a share sits in cash. The need for CardioNet's service continues to grow as the population ages. While it competes mainly with health care divisions of larger corporations, like General Electric's (NYSE:GE), a lot of good things can happen when you combine a pristine balance, activism and a medical need.
Activism with Precision
Zygo (Nasdaq:ZIGO) is a maker of ultra-high precision measurement instruments used in a wide variety of industries including semiconductors, aerospace and consumer electronics. These industries need ultra precise laser measurement equipment to provided the high-tech gadgets we use everyday. Zygo is a $153 million company that is now 20% owned by MAK Capital. The bulk the firm's purchases were made a price of $7.45 a share and shares are now 17% higher at $8.80. However, MAK recently bought another block of shares at around $10. Again, the company is debt free with $2.25 in cash per share.
What's intriguing here is that II-VI Inc. (Nasdaq:IIVI), a billion-dollar company also specializing in precision based instruments, recently withdrew a $10 a share offer for Zygo after Zygo management rejected the offer as too low. The largest shareholders were also in agreement that the offer price was too low and indicated that Zygo was not for sale. Clearly, the belief is that the company is worth much more going forward.
The Bottom Line
Activism is no sure sign that a stock is undervalued, or that it will succeed. Nor is there any guarantee with respect to the time involved in unlocking shareholder value. These risk factors, along with those inherent in the company's business, should always stand in the way before any attempt to invest. (For more, see Activist Investors: A Good Thing Or Bad Thing.)
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