How Activist Investors Saved Papa John’s Stock
John Schnatter — the original “Papa John” of Papa John’s International Inc. (NYSE: PZZA) — was spiraling.
After a series of controversies, he stepped down as CEO of the company he’d started. This was more of a blow for Papa John’s 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 company’s 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, we’d seen the stock fall 56% from its peak in 2016 to its low in 2019.
A lot of investors didn’t want to touch it.
But in early 2019, I was intrigued.
I started digging into the company’s 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 don’t.
As you can imagine, small investors like us don’t really make a difference to a company’s 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.
Here’s 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 don’t 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.
That’s 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 John’s 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. They’d seen success with activism in tech companies and other food and beverage stocks. One of their famous activist stakes was in Olive Garden’s 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 restaurant’s 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 John’s looked poised to be another winner — and I was right.
The activists came in and worked with Papa John’s to keep Schnatter out. In his place, they brought in NBA legend Shaquille O’Neal 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 John’s.
And I’m excited to see that there will be more opportunities like this in the coming months.
Activist Investors Are Ready to Pounce
With the pandemic in 2020, a lot of companies are having to shuffle their operations, catering specifically to the stay-at-home crowd. Even activist investors are having less success this year.
But we’re seeing promising news. According to CGLytics, activist investors have already been more active in 2020. And with more companies struggling — and a second wave of COVID-19 closures putting pressure on businesses — they’re going to see more opportunities.
We’ll be keeping an eye out for more of these in the next year or so.
And if you’ve been reading American Investor Today for a while, you know this isn’t the only special situation that has been getting us excited lately.
Finding successful activist investors is a special opportunity. But it’s just one kind of special opportunity that presents itself in the stock market.
My colleague, Charles Mizrahi, has been focusing on another type of special situation with the potential to see incredible gains.
He is eyeing three special-situation profit opportunities right here in America that could potentially deliver 500% gains each over the next five years.
Charles has been working on a way to bring these opportunities to everyday investors.
All the details are set to be revealed in just two days on Thursday, November 19.
But you have to be on this list.
Chad Shoop, CMT
Editor, Quick Hit Profits