John Schnatter the original Papa John of Papa Johns International Inc. (NYSE: PZZA) was spiraling.
After a series of controversies, he stepped down as CEO of the company hed started. This was more of a blow for Papa Johns than it might have been for any other company. Schnatter was the public face of the brand. He appeared in hundreds of commercials with his famous catch phrase: Better ingredients, better pizza.
But in 2018, Schnatter was ousted from the company entirely. All his public relations scandals added to slumping pizza sales and created a perfect storm of bad press.
Then, Papa John went on TV. In a bizarre interview, Schnatter said that the events of the past few years were part of a conspiracy against him. He slammed everything from the companys politics to its pizza recipe. The famous pizza cheerleader seemed to have finally hit rock bottom.
It had been a rough year.
By this point, wed seen the stock fall 56% from its peak in 2016 to its low in 2019.
A lot of investors didnt want to touch it.
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But in early 2019, I was intrigued.
I started digging into the companys financials. And I discovered something that got me excited
Activists and Pizza: A Great Mix
First, I need to explain something
Investors can be put into two buckets: active investors and passive investors.
Most of us are passive investors. We buy companies we like, and we sell companies we dont.
As you can imagine, small investors like us dont really make a difference to a companys bottom line.
But when a group of investors pool their money together, they can begin to implement real change in a company. They can create a special situation for even passive investors to benefit from.
Heres how it works, and why you need to be on the lookout for these investors in the coming months
When an investor wants to take a hands-on approach, helping to dictate broad decisions for a company, they become an activist investor.
A lot of corporations dont like them because they look to shake things up. If they buy enough shares, they can get themselves on the boards of directors. They can take active roles in the companies’ operations.
Their main goal is to unlock value for shareholders. As investors themselves, they are looking to capitalize on their position by seeing shares rise in value.
Thats the good part.
Even if you are a passive investor, you can still benefit with the right activist in a company in your portfolio.
This was important for Papa Johns in 2019. As I looked over their shareholders, I noticed that an activist hedge fund, Starboard Value, had taken a recent stake.
This fund had been on a roll. Theyd seen success with activism in tech companies and other food and beverage stocks. One of their famous activist stakes was in Olive Gardens parent, Darden Restaurants (NYSE: DRI).
Starboard took a stake one year, took control over the board the next, and began implementing changes at Olive Garden soon after. They started with the restaurants famous breadsticks. They realized that just by sticking to their own guidelines of just two per person, they could save $5 million a year in uneaten breadsticks.
Changes like this turned the stock around after the hedge fund took over. And DRI has continued growing since then.
Papa Johns looked poised to be another winner and I was right.
The activists came in and worked with Papa Johns to keep Schnatter out. In his place, they brought in NBA legend Shaquille ONeal to be the pitch man. They also worked to give the brand a fresh new look.
Shares went to an all-time high, up more than 100% from those February 2019 prices peaking at the end of August.
It paid off big-time to follow an activist hedge fund into Papa Johns.
And Im excited to see that there will be more opportunities like this in the coming months.
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