3 undervalued shares ripe for recovery

Activist investors like Carl Icahn have been drawn to ‘bargain basement’ FTSE 100 shares in recent months. They’re buying up major stakes in blue-chip companies, such as Unilever and GlaxoSmithKline, to effect change at the board level.

Some of these shares have been underperforming for some time and the firms are ripe for change. The wider market sell-off following the invasion of Ukraine by Russia has also offered buying opportunities for many underperforming blue-chip stocks.

Could investors benefit from piggybacking on their stock selections? We look at three company shares which are under the activist investor spotlight.

Unilever attracts Trian Partners

Like a number of other underperforming blue chip companies, Unilever PLC has added an activist investor – Nelson Peltz’s Trian Partners – to its shareholder register. Trian is pushing for a shake-up at the fast moving consumer goods specialist.

The food producer hasn’t had it easy of late. Several failed bids for GlaxoSmithKline's healthcare business and reported dissatisfaction among investors have left it licking its wounds.

Investor Terry Smith, founder of Fundsmith, complained that the company was too ‘woke’ and focused on sustainability at the expense of the bottom line. He called the bid to buy Glaxo’s health unit a “near-death experience,” while analysts at Bernstein Bank predicted it would generate £10bn of “value destruction” for investors.

Glaxo itself has been the subject of attention from activist investor Elliott Advisors, which last year tried to make CEO Emma Walmsley reapply for her job.

Back in 2016 Unilever shares hit 5,196p. Now the shares trade at just 3539p. They have lost 32% of their value in five years. Rising price inflation is currently eating into its margins, at a cost of €2bn for the first half of 2022, falling to €1.5bn.

However, trading at the purveyor of Magnums and Marmite is buoyant – with underlying sales growth of 4.5% for the full-year – and the company says price hikes will be passed onto consumers. While inflation is an issue, many of Unilever’s brands are necessities rather than discretionary items.

CEO Alan Jope has also placated investors by promising to avoid making large acquisitions from now on. And Unilever has another €3bn share buyback programme in the works.

Trian could be a catalyst for change, too. After the activist hedge fund manager took a stake in Procter & Gamble in 2018, the share price doubled from around 75p to 150p by 2020.

The current malaise and wider market sell-off could provide a buying opportunity for the shares over the long-term.

Carl Icahn vehicle pushes for change at Vodafone

The mobile phone giant’s shares have long been a disappointment for investors but hope may be on the horizon. Carl Icahn’s activist investment vehicle Cevian recently bought a stake in Vodafone Group and is pushing for change. It’s thought to be looking for the company to initiate more merger and acquisition activity within the European telecoms sector.

Fortunately, Vodafone’s chief executive Nick Read is on the same page and is also looking for acquisition targets within the EU.

We remain focused on our operational priorities to strengthen commercial momentum in Germany, accelerate our transformation in Spain and position Vodafone Business to maximise EU recovery funding opportunities,” he told investors.

“We are also committed to creating value for our shareholders through proactive portfolio actions and continuing to improve returns at pace."

However, Vodafone recently rebuffed an offer for its own Italian arm.

Cevian is also believed to be lobbying for a board shake-up and looking to add members with more telecoms experience than the likes of current incumbents, Sir Crispin Davis and Dame Clara Furse.

Could Aviva shares hit £8?

Cevian has also been busy building up a 5% stake in Aviva and is now its second-biggest investor after Black Rock. The activist co-founder Christer Gardell complained last year that the insurer “has been poorly managed for years." Gardell also said that its core businesses have been “held back by high costs and a series of bad strategic decisions.”

Cevian has demanded that Aviva return £5bn to shareholders and said it has identified £500m of cost cuts the company can make by 2023. The insurer is already on track to reduce costs by £300m by 2023 and is now returning £4.75bn to investors via B shares. Part of the share buyback programme includes a generous 40% hike in the dividend this year.

The vehicle also thinks Aviva shares could reach £8. They currently trade at 452p, having rebounded 21% from 375p in early March. Given the recent strong results and hefty dividend yield, the shares look attractive long-term.

The jury is out as to whether activist investors always add value or can represent a distraction for company management. However, like Warren Buffett, many of these professionals are practised at picking out undervalued stocks. As such, it can be worth making use of their superior research skills, influence and power to effect change at the board level.