Drafting is a technique in which you ride in the wake of another vehicle, and have its wind vortex pull you along. You see it a lot in car racing, but you can also witness it out on the highway when someone is following closely behind a big-rig truck.
Investors can do it too: You can try to follow along in the slipstream of billionaire hedge-fund operators, using their SEC filings to see where they're making big bets, and getting stock ideas from them.
Recently, personal finance website WalletHub examined the most recent SEC disclosures filed by more than 400 hedge funds and billionaires, and three companies that billionaires Carl Icahn, Nelson Peltz, and Bill Ackman had taken big stakes in caught my eye. Let's take a closer look at Freeport-McMoRan (NYSE:FCX), Procter & Gamble (NYSE:PG), and Automatic Data Processing (NASDAQ:ADP) to see why these were the biggest buys these legends added to their portfolios.
There's gold (and copper) in them hills!
Freeport-McMoRan is the world's largest copper producer, but it has been mired in a long-running dispute over its massive Grasberg mine in Indonesia. Between the government saddling it with tougher restrictions and higher taxes, and separatist guerillas vowing to destroy the mine as they fight for independence, Freeport has been suffering.
Added to its difficulties was a collapse in commodity prices that sent copper prices from $4.50 a pound back in 2011 to a low of around $2 a pound last year.
Thanks to a rally that began this past May, copper prices have recovered to over $3 a pound. That suggests good timing on the part of Carl Icahn, whose investment in Freeport has gained about 19% since he spent about $4 million to pick up more than 350,000 shares at an average price of $11.41 on the open market. He now owns around 91.6 million shares -- over 6% of Freeport's shares outstanding -- making him its third-largest stakeholder.
Freeport-McMoRan recently reported higher third-quarter profits on the strength of rising copper prices, which bodes well both for the miner and Icahn's investment. With copper being touted by some as "the metal of the future," following Icahn into the miner could help your portfolio too.
Change investors can believe in?
When activist investor Nelson Peltz disclosed his Trian Management Fund had taken a $3.5 billion stake in consumer products giant Procter & Gamble, he made it clear that he'd bought in for the express purpose of gaining a seat on the company's board of directors, and using his influence to help turn the business around. He asserted that P&G was saddled with "excessive cost and bureaucracy" and had lagged over the last 10 years in total shareholder return. Peltz wanted the company to reorganize into three business units: beauty, grooming, and healthcare; fabric and home care; and baby, feminine, and family care.
While P&G said it had taken many of Peltz's recommendations, he argued the company didn't go far enough. It apparently did go to far by claiming to have fended off Peltz's proxy battle and kept him off its board by a narrow margin. It turns out, though, Peltz actually won a seat on P&G's board. While management might challenge the results, the slim win means it will now be under extreme pressure to implement more of his plan and regain investor support.
With shares trading around the same level as when Peltz first disclosed his stake, there may be a good chance for more upside if he succeeds, and investors drafting in his wake can benefit from any changes he's able to effect.
Another tilt at windmills
That's not quite the same outcome Bill Ackman achieved, as he met with a proxy battle defeat after taking a $2.3 billion position in Automatic Data Processing and attempting to getting three seats on ADP's board.
ADP CEO Carlos Rodriguez used far more colorful language to describe the activist investor's defeat: The Pershing Square hedge fund operator got less than 20% of the votes cast in that bid for board seats. Ackman, however, is vowing to hang around and mount another campaign if ADP doesn't shape up.
His main charge against the payroll processor was that an array of inefficiencies are holding back its potential; he also said Rodriguez was not the person who should lead the company. That may explain why the CEO relished the proxy outcome as much as he did.
Ackman didn't have much support for his positions, as Institutional Shareholder Services recommended supporting only one of his candidates and another billionaire investor, Leon Cooperman, also described his critiques of the company as wrong-headed.
Shares of ADP are up 20% since the beginning of the year, though they've given back some of their recent gains. By taking a high-profile campaign to the payment processor, Ackman may have at least given investors insight into a potential opportunity that existed. Even if his own hopes to make a change were dashed, investors can still ride on his coattails with jobs growth surging again following the hurricanes that hit Texas and Florida.