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When to follow the barbarians

November 28, 2012: 9:45 AM ET

Hedge fund managers often profit by shaking up the ailing firms they invest in. It can pay to join the ride.

This article was published in the December issue of Money magazine.

The world of hedge funds may be shrouded in secrecy. But savvy investors can profit handsomely by following the public moves of some of the industry's high-profile players, especially as many are taking a more active role in cleaning up troubled companies.

In July 2011, Carl Icahn, one of the most famous "agitator" investors, put pressure on cellphone maker Motorola Mobility to do something with its lucrative patent portfolio. A month later Motorola sold out to Google (GOOG) for a 63% premium.

Last spring, hedge fund manager Dan Loeb of Third Point was instrumental in the ouster of Yahoo CEO Scott Thompson after Loeb found inaccuracies in Thompson's résumé. Shares of the online media company (YHOO) are up 15% since Loeb (now a Yahoo board member) disclosed Third Point's stake in fall 2011.

Other big hedge fund managers, such as Bill Ackman of Pershing Square and Nelson Peltz of Trian, have been increasingly quick to voice displeasure at companies they own. Should average investors listen up?

Stocks in their sights

While betting on ailing companies can be very risky, a big investor shaking things up can't hurt. But even billionaires don't have perfect records. And if you wait too long to jump onboard, you may miss the initial pop that often follows the news of their stake.

Related: How to profit from a breakup

If you're willing to take that risk for the chance of a big payoff, check out the stocks that managers are circling now.

Fresh off his victory at Yahoo, Loeb succeeded in getting energy company Murphy Oil (MUR) to spin off its gas station business in October. Marian Kessler, co-manager of the Becker Value Equity fund, holds Murphy and expects Loeb to push for more shareholder-friendly moves.

Icahn is seeking changes at the trucking firm Oshkosh (OSK). He also owns a stake in rival Navistar, fueling speculation that he might get the two to merge. (After this column was published, Icahn also disclosed a big stake in video streaming firm Netflix (NFLX). Ichan is urging the struggling company to look for a buyer.) Hedge fund manager John Paulson is pushing to break up Hartford Financial Services (HIG).

Ackman has recently set his sights on Procter & Gamble (PG). After taking a stake in the consumer products giant in mid-2012, he warned at an investing conference in October that the CEO should be on a "tight leash."

Related: Tips on investing in stocks

Robert Luna, chief investment officer at SureVest Capital Management, owns P&G and says he's encouraged that Ackman is making noise. "It's a good thing to see an activist in a stock you own," says Luna. "If they didn't see value there, they wouldn't be in."

Of course, gurus can fail. Icahn pushed for film studio Lionsgate (LGF) to sell itself in 2011 be fore giving up and dumping his stake for roughly what he paid, only to miss out on huge gains on the success of "The Hunger Games."

Still, barbarians are always trying to maximize their returns. When they're right, the little guy can profit, too, by simply mimicking their moves.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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