Every so often, Wall Street reminds investors that the stock market doesn't move up in a straight line. This has been one of those years, with all three major U.S. stock indexes plunging between 22% and 38%. This places the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite in the grips of a bear market.
However, a big down year for the broader market hasn't dissuaded billionaire money managers from putting their money to work. This is especially true of billionaire activist investors. An "activist investor" is an individual or investment fund seeking some level of corporate change designed to unlock or grow shareholder value.
While some short-term traders have been chased to the sideline by historic volatility and the longest bear market drawdown in more than a decade, activist investors can't stop buying the following three game-changing stocks this year.
First up is the "House of Mouse," Walt Disney (DIS 1.18%). Billionaire Dan Loeb of Third Point unveiled a roughly $1 billion stake in Disney this past August, along with a list of suggestions he believes will unlock value for shareholders. Loeb's requests included cost-cutting and a proposal for Disney to spin off sports network ESPN.
Loeb's call for Disney to tighten its belt is a reflection of the company's struggle to bounce back from the COVID-19 pandemic. While theme-park attendance has rebounded in a big way in the U.S., it's still contending with the pandemic in other parts of world. For instance, China's zero-COVID policy is a cloud that hovers above Walt Disney's China properties.
Additionally, Disney's digital push is costing a pretty penny. On the bright side, Disney+ has reached 152.1 million subs in less than three years. For context, it took streaming giant Netflix over a decade to reach the same number of subs once it shifted its operating model to streaming. Eventually, streaming could be a key part of Disney's cash flow machine; but for the time being it's a bottom-line drag as the company expands the reach of its streaming content.
Interestingly, though, Dan Loeb has since changed his tune on spinning off ESPN. In a September tweet, Loeb noted that he and his investment team have a "better understanding of ESPN's potential as a stand-alone business and another vertical for [Disney] to reach a global audience to generate ad and subscriber revenues."
The great thing about Walt Disney is that it doesn't necessary need Loeb's investment or guidance to thrive. Even though the company's share price has been running in place for seemingly eight years, much of this recent weakness has to do with the pandemic. These short-term concerns are overshadowing Disney's top-tier media assets and the exceptional pricing power of its theme parks. In other words, there's a good chance Loeb and Disney shareholders will be just fine over the next three-to-five years.
A second activist investor who's gone on the offensive during the bear market decline is Paul Singer of Elliott Management. In early August, Elliott confirmed it was social media stock Pinterest's (PINS -3.05%) largest shareholder, with a 9% stake in the company.
Although Elliott Management hasn't specified any changes it's seeking, its investment was announced roughly a month after Pinterest co-founder Ben Silbermann stepped down as CEO -- Silbermann stayed on as executive chairman. Singer's hedge fund has offered its full support for new CEO Bill Ready, who brings his successful e-commerce background to the table.
Although most social media stocks are being pressured by a weak advertising environment, Pinterest's third-quarter operating results demonstrate that it may be a step ahead of its peers. For instance, even though the company's monthly active user (MAU) count was unchanged from the previous year, MAUs rose by 12 million to 445 million by the end of September from the midpoint of 2022.
Furthermore, even though average revenue per user (ARPU) slowed considerably in the third quarter from the prior-year period, Pinterest delivered an 11% increase in global ARPU, with international markets (aside from Europe) supporting double-digit ARPU growth. What this tells investors is that advertisers are still willing to pay premium prices to reach its 445 million users.
But the best thing about Pinterest might be its operating model. Most social media platforms are reliant on data-tracking software to help advertisers target users. That's not the case with Pinterest. On its platform, users freely and willingly share the things and services that interest them. This provides key information that allows merchants to craft their messages for specific users. It's also a reason Pinterest appears poised to become a major e-commerce player before the decade is over.
However, Singer's hedge fund wasn't done when it waded into the activist pool this summer. In addition to taking a 9% stake in Pinterest, Elliott Management also entered into a $2 billion position in fintech stock PayPal Holdings (PYPL -2.44%).
Whereas there's no clear indication what actions Elliott Management wants made with regard to Pinterest, the fund has been quite clear with PayPal CEO Dan Schulman what changes should be undertaken. In particular, Singer's fund has pushed for cost-cutting measures and investments in a variety of mobile payment and digital wallet services.
When PayPal released its second-quarter operating results in early August and confirmed the $2 billion investment stake by Elliott, it announced plans to realize $900 million in cost-savings this year, as well as the expectation of increasing annual cost reductions to $1.3 billion next year. Although cost-cutting can only move the needle so far, a leaner PayPal should generate higher operating margins and provide a compelling value proposition to investors.
One interesting thing to note about PayPal is that, in spite of its poor stock performance in 2022, it continues to grow by a double-digit percentage. Excluding currency movements, total payment volume on its networks jumped 13% during the challenging second quarter.
What's more, the number of transactions completed on a trailing-12-month basis by active accounts has steadily climbed. This is particularly important given that PayPal is predominantly a fee-driven business. An increasingly engaged user base should yield higher gross profit for the company over time.
While Elliott's insistence on cost controls should help PayPal appear more attractive to value investors in the short run, I believe the company's digital payments focus would be undeterred with or without the guidance offered by Singer's hedge fund. Given that digital payments have an exceptionally long growth runway, PayPal looks to be a fantastic buy for patient investors.