We recently compiled a list of the 15 Stocks Targeted By Activist Hedge Funds. In this article, we are going to take a look at where Texas Instruments Incorporated (NASDAQ:TXN) stands against the other stocks targeted by activist hedge funds.
Shareholder activism continued at a record pace in 2024 as activist hedge funds pushed for strategic changes in various companies to unlock hidden value. In the first nine months of the year, 184 activist hedge fund campaigns were up and running, 26% above the four-year average. The surge came as new activists joined the fray and spearheaded 22% of the campaigns.
Why Was Shareholder Activism on The Rise?
A number of factors can be emphasized. One is the global economy cooling down. Although the US economy appeared to be on track to a soft landing, as many experts had predicted, economic growth remained timid, and other nations like Germany were on the verge of going into recession.
The rise of so-called ESG investing is another factor contributing to increased shareholder activism. Environmental, social, and governance, or ESG, is a relatively recent trend in which investors purchase stock in a company for its intrinsic value and because it performs well on ESG metrics. Some activist investors have positioned themselves as ESG-focused in the midst of this trend.
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Nevertheless, only 30% of the top ten activist investors accounted for the total campaigns in 2024, down from 46% in the same period in 2023. On the other hand, most of the campaigns were less successful in breaking into company boardrooms as management fought back.
Management pushed back on several campaigns even as activist hedge funds were forced to settle on management changes. Additionally, as investors’ newfound freedom to choose between management and dissident slates makes it easier to get representation on boards, the universal proxy card continues to lead to more settlements between activists and businesses.
Even though winning board seats isn’t the main goal of every campaign, the quantity of victories indicates how well businesses are defending themselves. Dissidents won 74 seats in the first half, compared to 93 in the same period in 2023. Activists only secured 11% of the seats they were vying for in US proxy elections, compared to 65% in 2023.
Similarly, a push for company sales by activist hedge funds hit a snag as buyouts throughout the year were scarce owing to the high interest rate environment. High interest rates made it difficult for companies to access cheap capital that they could use to complete acquisitions.
According to Jim Rossman, head of the Barclays advisory group, there hasn’t been much merger and acquisition activity in the past two years. The activists’ preferred method of obtaining value from a company’s stock is weakened as a result. The most frequent demand of activists is still M&A, but they are now more focused on altering a company’s board and management.
“Activism has become increasingly sophisticated as a tactic,” says Rossman, who sees firms hiring bankers, lawyers and private equity veterans. “There’s a greater depth of understanding on how to unlock value in companies.”
As corporate board nominations open in the new year, the pace of activism is expected to increase in the upcoming months. According to Rossman, activist demands for M&A may resurface in 2025 as private equity firms look to use their growing cash and their current holdings.
Activist hedge funds typically have minority, long interests in underperforming businesses that have significant potential for value development. Since value investors make up the majority of activist investors, they must first find undervalued companies.
Our Methodology
To make our list of stocks targeted by activist hedge funds, we looked for companies that made the headlines in the context of renowned activist investors taking a position. We then ranked these companies based on their latest market capitalization.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A robotic arm in the process of assembling a complex circuit board – showing the industrial scale the company operates at.
Texas Instruments Incorporated (NASDAQ:TXN)
Company Market Cap as of December 31: $171.1 Billion
Number of Hedge Fund Holders: 57
Texas Instruments Incorporated (NASDAQ:TXN) is a technology company that designs, manufactures, and sells semiconductors to electronics designers and manufacturers. It offers power products to manage power requirements across various voltage levels. The stock was up by 10% in 2024, rallying to record highs as investors reacted to the company’s strategic positioning amid growing demand for chip technology.
Activist hedge fund Elliott Investment Management took a $2.5 billion position in the chip technology company. With the positioning, the hedge fund started agitating for the company to consider adopting a dynamic capacity management strategy. It also urged management to focus on achieving a free cash flow per share target of $9 a share by 2026.
Elliott claims that Texas Instruments Incorporated (NASDAQ:TXN) free cash flow has decreased by over 75% since the company began a significant capacity ramp-up in 2022 and that shareholders have received little information about when free cash flow per share will return to its historical average.
According to the activist investor, the company has expanded its capacity beyond the anticipated demand. Consequently, it is calling for the company to adopt a dynamic capacity management strategy to bolster per-share free cash flow.
Despite a poorer performance in Europe, Texas Instruments Incorporated’s (NASDAQ:TXN) automotive revenues have grown significantly, with strength in China making the difference. The company’s auto revenue growth from quarter to quarter was higher than anticipated. Furthermore, TXN has observed a broader cyclical recovery, with notable expansion in the fields of communications equipment, enterprise systems, and personal electronics, all of which are still below their prior peak levels.
The Diamond Hill Select Strategy likes Texas Instruments Incorporated (NASDAQ:TXN)’s long-term outlook, as revealed in its Q2 2024 investor letter:
“Among our top individual contributors in Q2 were Amazon, Texas Instruments Incorporated (NASDAQ:TXN) and Mr. Cooper Group. Shares of semiconductor manufacturing company Texas Instruments rose in Q2 as demand in several of the company’s end markets show signs of recovering. Given the company’s long-term prospects, competitive positioning and scale advantages, we believe the outlook for the company from here is strong.”
Overall TXN ranks 1st on our list of the stocks targeted by activist hedge funds. While we acknowledge the potential of TXN as an investment, our conviction lies in the belief that certain AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TXN but that trades at less than 5 times its earnings check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.