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Three red flags to add to your investment checklist – Insight from shareholder activist filings

Most of the activist letters and proxy documents contain heavy arguments about the management and the board. These arguments range from capital allocation to corporate governance.

Some arguments are distinct and worthy to note. In fact, if added to the “investment checklist”, it could improve the investment research process. #1 Transactions that are favorable to an insider #2 Arguments against a buyback #3 Issuing stock options at a significantly lower exercise price than a recent buyback program

ZAGG : Significant percentage in Roumell Capital’s portfolio and signs of moat

Roumell Capital’s top five stocks account for 57% of the total portfolio. ZAGG accounts for 17% of the total portfolio – Rank #1
Signs of Moat – The company’s screen protection products enjoy a 51% market share in the US market. Moreover, the company enjoys 67% market share of US battery cases; 35% market share of US external power; 23% market share of US wireless charging pods.

Two insightful letters from activist investors

Activist’s letters and presentations are long, and most of the contents are arguments that highlight mistakes of the management or the board. We extract the sections that provide readers with “insights”.
Two wonderful letters:
1. Laughing Water Capital says Iteris, a micro-cap company, enjoys a huge market share and has the potential to be a $billion+ company
2. Edenbrook Capital applauds the Marchex management for its initiatives over the course of 2018; Believes that the stock is worth $6.25 per share

Agilysys: Significant percentage in MAK Capital’s portfolio and signs of moat

MAK Capital runs an ultra-concentrated portfolio with just five stocks. Agilysis is the second largest position, and accounts for roughly 25% of its portfolio. Agilysys has been a leader in hospitality software for more than 40 years. The company has shifted from the legacy business model (license and maintenance) to the SaaS model. Generally speaking, SaaS customers face huge switching costs – (a) risk of data loss from migration from one platform to another platform; and (b) the learning curve involved with learning a new platform.

Looting of assets and attempt to kill: Investors who track 13D filings have every right to remain silent

Even though shareholder activism is a fertile hunting ground for finding ideas, there are some situations when it is better to avoid getting involved too early. For example, from an investing standpoint, when a shareholder refers to an insider’s transaction as “looting of assets” and “little more than theft”, it is better to stay away from the situation until the “core problem” is solved.

Key takeaways from Luby’s proxy campaign outcome

(1)  Huge insider ownership is always a hurdle in a proxy fight, irrespective of shareholder sentiment. (2) ISS, a proxy advisory firm, approves an activist investor nominating a family member as a nominee. (3) Overcommitted nominee is voted against by ISS and G&L.

Do you think activism is easy? think again

As a part of preparing an investor presentation, the activist group visited 200 stores, interviewed 100+ industry experts and 40 former employees, surveyed 650 customers, reviewed 15 years of SEC filings and 10 years of earnings transcripts, had discussions with advisory firms… well, the list continues.

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