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 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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David Hanson has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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