Should You Jump on Soaring CommonWealth REIT?

David Einhorn. Carl Ichan. Bill Ackman... Corvex and Related?

So far, 2013 has been "The Year of the Activist." Two months into the year, shareholder activists have dominated the financial media with everything from billionaires dueling over a nutrition company to lawsuits being filed against Apple for hoarding too much cash. Today, Corvex Management and Related Fund Management burst onto the scene today after aggressively attacking the Board of Trustees at CommonWealth REIT (NYSE: EQC  ) and the company's supposed value-destroying actions.

As fellow Fool Sean Williams pointed out on Monday, shares of CommonWealth REIT took a beating after the company announced its plans to access the capital markets and issue up to 31 million shares of stock. Shareholders are rarely pleased if their holdings are set to be diluted, and in this case, CommonWealth REIT was planning to throw salt into shareholder wounds by issuing stock with shares trading at a 43% discount to book value. In a more ideal scenario, a company would aim to issue additional equity when management feels its share price is at a premium level.

After claiming the proposed action spoke "to the incredible disconnect between the goals of CWH shareholders and the Board," Corvex and Related asserted that its independent assessment of CommonWealth REIT's properties and assets estimated the stock to be worth $40 per share, a considerable premium compared to Monday's closing price of $15.85.

Hope you held onto your shares...
As if publicly valuing the shares of the company 2.5 times its current price wasn't enough good news for shareholders who held on to their stock through Monday's slide, Corvex and Related, which currently own almost 10% of the common stock, announced they were prepared to acquire all of the outstanding shares at a "significant premium" if management did not reverse course.

How could investors not be excited here: They're being told that their stock is undervalued and that there's an offer to buy shares at a "significant premium." Shares of CommonWealth REIT closed up over 50% this afternoon.

Looking ahead
If you are keeping track of the stats in this story, today's closing price was $24.40 per share. The two funds were reportedly willing to pay $25 per share and potentially "meaningfully increase" that offer. The two firms' independent property and asset analysis valued the company at $40 per share. Therefore, despite today's soaring price, is there still money to be made in this suddenly hot-topic REIT?

Typically, after institutional investors or large shareholders publically declare their intention to either buy or short a company's stock, the success or failure of the share price is likely to become a binary event. Here at The Motley Fool, we advocate investing in companies with superior competitive advantages, a proven management team, or beneficial long-term trends. While it may be an interesting story to follow and end up being an example of powerful shareholder activism, without any meaningful insight to the intentions of these institutional players, investors may be best served by watching from the sidelines and allocating their capital to businesses they view as long-term industry leaders.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 27, 2013, at 12:48 AM, gratianus wrote:

    Thought it's fine and good to invest in, as MF intends, "companies with superior competitive advantages, a proven management team, or beneficial long-term trends," if you can find a dollar trading for 50 cents, I think it's worthwhile to own that prospective dollar. As Buffett, supposedly said referring to Steinberg and Cummings, the co-operators of Leucadia National, if you pick up a cigarette butt in the street for free and it has a few good puffs, you can profit handsomely. Perhaps the market closed the gap between where CWH closed yesterday and where today's bidders claim they would pay for the whole company ($25), but it's also possible that their "bid" will flush out other value investors interested in buying CWH's abysmally run portfolio for more than that. For what it's worth, an investor letter, highly rated by Hulbert, Sound Advice, has been saying that CWH is worth much more than its price. For years (literally) the editor has been saying that, and for years he has been punished. Maybe finally the market has recognized that value. We'll see. But if this is the start of the end for the Portnoy family's stranglehold on CWH, all I can say is hurrah. What took so long.

  • Report this Comment On February 27, 2013, at 11:47 AM, stormraven wrote:

    Let's harken back to when CWH was a "sure fire, can't miss, no-brainer, hold it until you die MOTLEY FOOL RECOMENDATION" for a second shall we? Back up the truck they said, buy big and hold for a ten bagger they said.

    CWH was an "industry leader with strong management, fundamentals, blah,blahblah" everything you just said.

    And so I did. And it's been hemorraging ever since. In fact, I only got back to even yesterday for about 11 minutes because I reinvested all the 10 plus years of dividends.

    It's too late to watch from the sidelines. The only decision now is, sell for no profit/small loss or hang on and hope for the take-over so I get SOME return on 10 plus years of idle money.

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