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The Schedule 13D can be a sign that drama is afoot. Whenever an
investor buys a major portion of a firm's stock — a possible first step in a
takeover battle or a management shake-up, moves that can boost the stock
price—that investor must file a Schedule 13D. Conversely, a Schedule 13D can
signal impending bad news, since the shareholder must also file one when he has
reduced his stake to below the reporting threshold.

The Rules

A Schedule 13D must be filed any time a person, company or
group has bought 5 percent or more of a company’s shares, or sold enough stock
for its stake to fall below 5 percent. It must be filed within 10 days of the
transaction. (A large shareholder who doesn’t intend to take any meaningful
action can file the short form, 13G.) A group that collectively holds 5 percent
or more of a company must also disclose its stake, even if no one member
exceeds that threshold. In that case, the Schedule 13D will include the names
of all associated investors with voting power or the ability to sell shares.

What to Look For

You can search for 13Ds by company to see what the firm’s
major shareholders are up to. Alternatively, you can search for 13D filings
from a particular investor. For example, Warren Buffett disciples like to know
when the Oracle of Omaha issues a 13D disclosing a big position or sale. When
examining 13D filings, pay close attention to the following:

buying (or selling). Schedule 13Ds are especially useful for keeping
tabs on activist investors, who often engage in takeovers and proxy fights that
can push a stock’s price higher. Here’s an A-list of activist investors:

  • Carl Icahn

  • Kirk Kerkorian (Tracinda Corporation)

  • Eddie Lampert (ESL Investments)

  • Ralph Whitworth (Relational Investors)

  • Seth Klarman (Baupost Group)

  • Nelson Peltz (Trian Fund Management)

  • Bill Ackman (Pershing Square Capital)

  • Richard Breeden (Breeden Partners)

Investors like these look for companies that aren’t living
up to their potential. They take big positions, then try to shake up the
company to make money for shareholders. “When an activist investor like Carl
Icahn files a 13D disclosing a new position in a company’s stock, it’s a pretty
safe bet that the investment isa precursor to some sort of challenge to
the status quo,” says Chris Carey, editor of investment blog href="">ShareSleuth.
“It could be a takeover offer, an effort to shake up management or an attempt
to break up the company to unlock hidden value.”

Fellow shareholders can ride the activists’ coattails to
big gains. Carey gives as an example Icahn’s June 2009 13D filing, which
disclosed that he had boosted his stake in Lions Gate Entertainment Corp. to
16.9 percent. “The shares rose nearly 9 percent in a single day,” he says. “And
the stock has gained another 15 percent since then.”

they’re buying or selling. Check the “Purpose of Transaction” section,
which offers insight into the investor’s intentions. For example, Icahn and his
associated businesses issued a 13D on November 24, 2008, disclosing that they
had purchased more than 5 percent of Yahoo. The filing explained that Icahn “is
in favor of pursuing a transaction with Microsoft relating to the Issuer’s
search business” and that “Mr. Icahn has also had discussions with Microsoft
regarding such a transaction.” The upshot: A Yahoo-Microsoft deal suddenly
became much more likely — and the stock jumped 21 percent over the following

The “Identity and Background” section provides details about
the investors involved in the transaction. The information can be valuable if a
well-known investor is buying through an anonymous-sounding partnership.