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This year hasn’t been good for ESG-focused investors. The environmental, social, and governance (ESG) framework filters companies beyond their profitability baseline. Yet, more ESG funds closed in 2023 than in previous years. 

In June, ESG’s foremost promoter and facilitator, BlackRock’s CEO Larry Fink, noted that the catch-all term has become “entirely weaponized.” At the same time, such investment filtering doesn’t rely on labels.

Investors still need accurate reporting to make activist decisions. The ESG reporting software market is still poised for a 21.30% compound annual growth rate (CAGR) between 2022 and 2027, up to $1.73 billion. In this space, activist investing has become more prevalent.

Focusing on the G part of ESG, activist investors aim to gain a larger stake to direct the company in their desired direction. Which three stocks have received such targeting and why?

Crown Castle Inc. (NYSE: CCI)

In 2020, activist investor Elliott Investment Management said it was displeased with Crown Castle’s corporate governance. The company provides real estate infrastructure for the bulk of the US wireless carriers. Valued at $71.5 billion as of Q2’23, Crown Castle operates over 40,000 cell towers and over 85,000 miles of fiber cable. 

At the end of this November, Elliott submitted a Section 220 demand on Crown Castle to inspect the company’s bookkeeping, with a $2 billion stake in tow. Elliott alleges that Crown Castle’s Board violated shareholders’ fiduciary duty by instituting amendments that had the effect of stifling:

“even the most basic forms of shareholder communication and at the very least were designed to weaken the shareholder franchise,”

Jesse Cohn, Elliott Investment Management partner, together with Jason Genrich, senior portfolio manager, on November 28th

If Elliott’s Section 220 leads to an actionable lawsuit leading to Crown Castle’s board restructuring, CCI shareholders could benefit from intercepted “disenfranchising.” As of June 2023, Elliott Investment Management holds $59.2 billion in assets, returning on average 4.9% since 2018 across 76 activist stock positions.

At the same time, Crown Castle’s business model and leading infrastructure role in communications have yielded a consistent return on investment (ROI), standing at 5.43% as of September.

Based on 19 analyst inputs pulled by Nasdaq, CCI stock is a “buy.” CCI shares jumped 20% over the last month following Elliott’s engagement. The average CCI price target is $106.27 vs current $117.93. The high estimate is $126, while the low forecast is $90 per share.

Phillips 66 (NYSE: PSX)

Over the last three years, up to November, Phillips 66 reported over 150% shareholder returns. The global company offers energy manufacturing and logistics, ranging from crude oil/natural gas pipelines to petrochemicals and fuel refinement. Similar to CCI, PSX shares jumped 14% over the month.

In the Q3 earnings report, Phillips reported a $1.2 billion return to shareholders via stock buybacks and dividends. The goal was to return at least 50% of operating cash flow to shareholders. Yet, with a raised $1 billion PSX stake, Elliott Investment Management is pushing for two board seats. 

Elliott’s goal is to boost Phillips 66 refinery performance, potentially increasing PSX shares by 75%. 

“…we believe the Board must take several steps to reassure investors that Phillips 66 is in the best possible position to achieve its value-creation potential.”

John Pike, Elliott’s partner, alongside portfolio manager Mike Tomkins, on November 29th

Elliott referred to its activist impact on Marathon Petroleum (MPC) since 2019, having the company outperform its peers by ~200%. With a similar impact on PSX, Elliott argues that new governance would generate $15 billion – $20 billion after-tax cash following the sale of the company’s CPChem stake alongside streamlining other assets.

Based on 19 analysts pulled by Nasdaq, PSX stock is a “strong buy.” The average PSX price target is $133.2 vs the current $130. The high estimate is $150, while the low forecast is $116 per share. 

The Goodyear Tire & Rubber Company (Nasdaq: GT)

Following CCI and PSX, GT shares received a 20% boost over the last month. This American multinational is a tire manufacturing icon, founded at the end of the 19th century. Elliott began its activist push this May, claiming that five new highly qualified independent directors to the Board would improve the company’s performance and subsequent GT performance.

More precisely, Goodyear failed to monetize its trapped value across its store network properly. 

“Relative to the S&P 400, Goodyear has underperformed by 90% over the past five years and 143% over the past ten years. Relative to proxy peers, key competitors and relevant indices such as the Dow Auto Parts Index, the story of underperformance is similar.”

Marc Steinberg, Elliott’s senior portfolio manager, alongside portfolio manager Austin Camporin, on May 11th

With Elliott’s plan to reduce the company’s leverage and accelerate growth, the company could start generating over $16 per share. On November 15th, Goodyear CEO Richard Kramer resigned to settle with Elliott’s activist investing push. 

In November’s Q3 earnings report, Goodyear generated 3.2% less sales from a year-ago quarter, delivering a net loss of $89 million at $0.31 EPS loss. The cited reasoning for these losses was operations reorganization in Europe, Australia, and New Zealand to streamline long-term cost structure.

This aligns with Elliott’s claim in May that “Goodyear’s margins are the lowest in the tire industry, trailing its closest peers, Michelin and Bridgestone, by ~700 basis points.” Now that the activist push is finalized, investors expect a new turn for the company.

Based on eight analyst inputs pulled by Nasdaq, GT stock is a “buy”. The average GT price target is $17.95 vs. the current price of $14. The high estimate is $21, while the low forecast is $16 per share, above the current price at press time.

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