Hi everyone. I’m Tim Melvin, and welcome to A Better Way to Wealth.
Today, as we slowly roll further into 2022, I want to start us off with a few special situation activist picks.
These are stocks in which corporate activists (or corporate raiders like we used to call them in the old days) have taken a position in some companies and assets, and they’re trying to force for changes.
A lot of times they’re talking about making improvements by forcing changes in management, but usually the goal is the ultimate sale of the company, returning all that lovely cash to the shareholders as big profits.
With that in mind, today I’ve got three special situations that we can look at to start off 2022 that I believe have the potential for big profits as we head into the new year.
Activists Get Involved
First off, I want to tell you more about a closed-end fund activist arbitrage investment firm.
What this means is activists will go in and try to force a closed-end fund to do a tender offer or convert to a regular mutual fund… Pretty much whatever it takes to eliminate the discount.
Having a history of very successful runs at doing just that, this firm is currently one of my favorites.
Bulldog Investors was founded by a man named Phillip Goldstein, a civil engineer who started off working on bridges for the City of New York all over the greater Manhattan area.
It was during these early years that Goldstein realized he was very attracted to the math of closed-end funds where, because they’re traded on the exchange, they’re exposed to all the psychological soup that is the stock market.
In cases like these, if a fund is really popular or in a hot sector, the shares can trade at a premium to, or for more than, the actual value of the stocks and bonds owned by the fund.
And when they’re out of favor or simply ignored, as is the case with many closed-end funds, they will trade at a discount to the net asset value, allowing savvy investors to swoop in.
That was a very tempting proposition for early activists like Goldstein who have done a fabulous job of doing just this over the years…
Accumulating a decent position on a stock and leaning in on management to do whatever it takes – whether it be to liquidate the fund, conduct a tender offer, do a stock buyback, turn it into a regular open-ended fund or merge it into an existing exchange traded fund – to make the discount go away.
Over the years, Bulldog has found great success utilizing this strategy and, most recently, they’ve done this with one fund that I believe is in a very interesting business.
Tortoise Power and Energy Infrastructure Fund, Inc.
Tortoise Power and Energy Infrastructure Fund, Inc. (TPZ) invests in a portfolio of fixed income and equity securities issued by power and energy infrastructure companies.
Tortoise currently owns 8% of this particular closed-end fund and owns the stocks and bonds of traditional energy infrastructure.
I’m wildly bullish on this stock, and I’ve talked about it quite a bit.
Utilities like pipelines, gathering and processing centers, oil and gas storage facilities… All these things are dramatically undervalued in my opinion because everyone’s so focused on renewables without taking the time to get past the surge of political statements and activist claims to see that we’re still going to use a lot of oil and gas for a very long time.
That’s why this infrastructure is not only incredibly valuable but continues to throw off a lot of cash flow.
Now, this fund is a little more forward-looking because, while they own all these nice, traditional energy infrastructure assets, they’re also starting to look ahead and buy some of the companies that are going to be a part of the energy transition.
Now, don’t fool yourself. Renewables are going to be the fastest-growing source of energy in the United States and around the globe.
Wind and solar power are going to grow at a very high rate for a very long time and eventually, perhaps sometime after 2050, they will produce more than the traditional oil and gas companies do, but it’s clearly going to take at least that long, if not longer.
However, these will be high-growth opportunities and, as said above, this fund has already started to transition and add some of these assets to the portfolio mix for the longer term.
That being said, this does appear to be a good fund and there’s a lot of things that could happen here.
Thanks to 2020 and the oil collapse, the longer-term track record isn’t all that attractive right now, which is exactly why activists like Goldstein have chosen to get involved.
There are a lot of unhappy shareholders, as this stock is currently trading at a discount at around 13% of the net asset value.
Seeing this, Bulldog has recently sent a letter to Tortoise advisors and pretty much said, “We’re an 8% owner and the largest shareholders in this fund. We want you to conduct a tender offer to buy back stock at or close to net asset value to reduce that discount.
We also believe that if more than 50% of shareholders accept the idea to tender their shares, we should go ahead and liquidate or merge this fund into an existing mutual fund or exchange traded fund to eliminate the discount.
If you don’t want to do that, liquidate it and send us the cash back if more than half the folks that own shares decide to tender their shares at or close to net asset value.”
Bulldog has utilized this strategy several times, and it has worked quite often. Should it not work, for whatever reason, in this instance, I’m perfectly content to own that collection of assets (infrastructure for traditional energy and renewable energy companies) for the long term and collect my 5.43% dividend yield.
However, Bulldog is successful with this strategy more often than not, so what I really think we’re going to see is a quick profit of close to 20% after we collect a couple of dividends and it eventually merges into another fund.
Therefore, I’m encouraging you to keep a close eye on TPZ in the days to come… A live activist situation that I believe has a lot of upside with very little downside as we go further into 2022.
Superior Industries International, Inc.
An activist firm by the name of Mill Road Capital has bought more shares of Superior Industries International, Inc. (SUP).
Mill Road has been buying quite a bit of Superior stock recently, and they’re also selling the $5 puts for January and July of 2022 to back into the stock should it pull back. They now own over 11% of this company in total.
Now, to me, Superior is a fascinating company… They make aluminum wheels for cars, selling them to all the major manufacturers around the world.
Here’s the thing, though… We all know electric vehicles are on their way, and companies are going to be producing a lot of them. These aluminum wheels will be used almost exclusively on such automobiles.
This is because EV producers are going to want the lighter, stronger aluminum wheels since they’ll need to keep their cars as light as possible for the simple fact that they’re using electricity to drive it and more weight means more electricity being burned up.
With that in mind, I foresee aluminum wheels having quite a future ahead of them, and Superior Industries is currently one of the major suppliers of this product to the industry.
Now, I’m not going to be shocked if Mills Road forces a sale of this company because I can think off the top of my head a bunch of larger, more established distributors of products to auto manufacturers that would love to make this purchase and get their hands on this company at the right price.
Community West Bancshares
Finally today, I want you to take a look at one bank stock activist, PL Capital who currently owns 6.2% of Community West Bancshares (CWBC).
Community West is a company that delivers a wide range of commercial and retail financial services such as various loan and deposit products through the operation of the bank.
Now, you should know by now that I love bank stocks, and a second look at this company should help explain why…
PL Capital recently expressed some concern to Community West officials that a lot of the company officers and directors don’t own very much stock in the company, which presents very bad optics in a smaller community bank stock.
PL Capital is currently pushing for change and will more than likely push for a sale of the bank.
This bank is trading at 10 times earnings, isn’t too far above book value and is in a very attractive market in the Central California coastal area.
If somebody comes along and buys this bank at 15-20 times earnings and 1.5 book value or more, this wouldn’t be surprising, giving us a nice gain from what appears to be a very low-risk situation.
As you know, that’s a great recipe for big profits in 2022.
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