'Predator's Ball' Stock Market (And Sentiment Results)...

Summary

Third Point gains activist stake in Advance Auto Parts, causing the stock to jump.
Those who buy high-quality assets at low prices benefit when billionaire activists enter the same companies.
Positive developments for 3M include a new CEO, a healthcare spin, and a guidance upgrade.

Wall Street in New York City — JaysonPhotography

General Outlook

On Tuesday afternoon, following the inflation report, I joined Nicole Petallides on the Schwab Network to discuss the general market outlook, Fed, Inflation, Hedging, Stocks, and more. Thanks to Nicole and Kaitlyn Crist for having me on:

Predator's Ball

Two weeks we did a comprehensive follow-up on our Advance Auto Parts position.

We talked about it in the $50's on Fox Business' "Making Money with Charles Payne" on November 15, 2023, and just last week talked about it on Fox Business's the Claman Countdown with Liz Claman.

On Monday, the Wall Street Journal broke a story that Dan Loeb's Third Point had accumulated a large activist stake in Advance Auto Parts and gained 3 seats on the Board. The stock jumped yet again:

Now you might say, "wow, that was lucky Tom!" I would not attribute it to luck for two reasons:

1) the move has barely begun - as with most positions these have multi-year time horizons. The exception is when we hit intrinsic value well ahead of target (less than a year) like several names last year: Rolls Royce (fully out of position now - final 1/3 ~$5), INTC (still hold 1/3 after taking off 2/3 in high 40s), VNO (exited after ~double), etc. Those are exceptions, not the rule. CPS hit 4x at one point and we haven't sold a share. Why? because it was nowhere near our estimate of intrinsic value when we initially entered the position in the position ~$5.10. That one may take several years for us to hit our intrinsic value targets.

2) Good things happen when you buy high-quality assets at low prices. If you learn nothing else from me, that is the #1 lesson. Not only did activist Dan Loeb come into AAP after us, but it has happened over and over in the last couple of years:

DIS (Disney) - Peltz (pt. 2) and ValueAct came in after us.

VF Corp (VFC) - Engaged Capital and Legion Partners came in after us.

CCI (Crown Castle) - Paul Singer and Elliot Management came in after us.

Four positions (out of a very concentrated portfolio) had billionaire activists see what we saw "price is what you pay, value is what you get" and enter the same companies after us.

Success leaves clues and these folks didn't become wealthy doing "zero-day options" or analyzing "squiggly lines" to get a perceived edge.

The only difference they bring to the table is they can tilt the scales faster to turn the "short-term (emotional) voting machine" (of irrationally low prices) to the "long-term (fundamental) weighing machine" (of fairly/fully valued prices) by agitating management to make changes more expeditiously - through public pressure.

We get the benefit of riding their coattails while they pay Willkie Farr $2,000/hr to draft threatening letters to the Board and foment change.

This is not dissimilar to the "Predator's Ball" days of the 1980's. The only difference is in the 1980's activists got the whole company, now they just get a few Board seats!

These "Balls" put many people on the map and created Billionaires from thin air. Milken financed Carl Icahn, Nelson Peltz, Ron Pearlman, Steve Wynn, Henry Kravis, T. Boone Pickens, Reginald Lewis and many more - BEFORE they were household names…

It worked until Marty Lipton (of Wachtell Lipton) invented the poison pill. Here's how it works:

With the advent of the "shareholder rights" plan or "poison pill" activists were now incentivized to publicly agitate for change and fight for seats on the Board. Beyond that, their powers have become significantly limited relative to the swords they wielded in the 1980's.