Dear Activists: Buying Stock Can Effect More Change Than Selling It

Gun stocks veered from historical trends and sold off in the wake of the latest U.S. mass shooting.

Two weeks after the Parkland, Florida massacre that left 17 dead, Vista Outdoor Inc VSTO fell 10.2 percent, Sturm Ruger & Company Inc RGR 7.5 percent and American Outdoor Brands Corp AOBC 7.3 percent.

Some sales have been financially motivated — calculated reactions to sentiment changes and the looming threat of sales-stunting regulation. Dicks Sporting Goods Inc DKS’s ban on assault-style rifles is an indisputable headwind in the gun stock thesis.

But not all divestments are about the bank account. For socially responsible investors, as they’re called, the strategy is one of protest, a tangible expression of disapproval of the companies’ missions and an effort to cause financial pain.

"We can make a clear and powerful signal that the inaction by Congress is heartless, it's intolerable and there are people who want to make sure that kids aren't losing their lives," California State Treasurer John Chiang told NPR after urging colleagues managing the state’s pension funds to divest gun stocks.

A Less Ideal Vantage Point

Although certainly well-meaning, fund withdrawals may not be as impactful as activists intend. When shareholders surrender ownership, they also surrender their authority within the company and any power they have to inspire change from the inside.

Hence the concept of activist investors.

From the start, the strategy may seem counterintuitive, as it can bolster the enemy’s spending cash and potentially catalyze a stock run.

But the markets’ most lauded and feared changemakers didn’t sell positions to make passive statements. They bought in, earned the right to demand investigations and file resolutions, and raised hell internally.

Paragons Of Changemaking

That’s how People for the Ethical Treatment of Animals got its way at SeaWorld Entertainment Inc SEAS, where it inspired a ban in captive orca breeding. It employed the same strategy at McDonald’s Corporation MCD, Tesla Inc TSLA and General Electric Company GE.

Similarly, Carl Icahn didn’t pressure an Imclone Systems sale to Eli Lilly and Co LLY by severing ties with the company. He bought a stake and waged a proxy battle.

Jana Partners did the same to prod a Whole Foods Market sale to Amazon.com, Inc. AMZN.

The list goes on and includes such famed investors as Nelson Peltz, Bill Ackman and David Einhorn and targets like Buffalo Wild Wings, Barnes & Noble, Inc. BKS and Procter & Gamble Co PG.

Andrew Ross Sorkin suggested in the New York Times that BlackRock's Larry Fink wields the power to force a similar narrative with gun makers.

Of course, activist investment isn’t always successful. Ackman suffered a major loss both in mission and money at Valeant Pharmaceuticals Intl Inc VRX, and Einhorn failed in his campaign to split General Motors Company GM stock into two classes.

But if they’d divested positions in protest rather than buy in, they’d have never been heard to begin with.

Related Links:

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What Happens To A Stock When An Activist Liquidates A Position?