If you want an explanation on how the market has been able to keep running higher even against a tepid economic recovery and spiraling geopolitical crises, look no further than activist investors.

#-ad_banner-#​These billionaire hedge fund managers buy stakes in companies that are mismanaged or underperforming and push for shareholder value. Before just a few years ago, the group was not relatively well known and limited funding meant limited power to provoke change.

That is all changing and a wave of funding for activists like Carl Icahn and Daniel Loeb is giving them the power to unlock billions in shareholder value.

Case in point: After shares of Yahoo (Nasdaq: YHOO) went nowhere for the three years to 2012, Loeb’s Third Point LLC acquired shares and pushed for three seats on the board. That May, Loeb uncovered that CEO Scott Thompson had misrepresented his resume with a computer science degree. Marrisa Mayer was championed as the new chief executive and the shares boomed 167% in the 15 months to the beginning of this year.

Carl Icahn never got his wish for Apple (Nasdaq: AAPL) to return $150 billion to shareholders, but scrutiny over the company’s huge cash stockpile certainly hasn’t hurt. Shares surged 23% in the four months following Icahn’s attention in August 2013, well ahead of any help from the new iPhone.

As influential as the activists have been over the last couple of years, this may be just the beginning and investors should look for the next round of targets.

Get ready for Activist Investing 2.0

Activist hedge funds have recently raised massive amounts of cash. Third Point LLC raised $2.5 billion in just the first two weeks of August. The fund received requests from investors that wanted to contribute a combined $3.4 billion, well over Third Point’s $1.5 billion target — a sign of strong future inflows.

Nelson Peltz’s Trian Management Fund raised $1 billion in the first half of 2014 and is on track to raise another billion in the second half of the year.

In total, funds under management at activist hedge funds grew by $9.4 billion in the first half — more over just six months than in the previous two years combined, according to Hedge Fund Research.

Not all companies will come under the watchful eye of an activist investor though. Activist targets are generally older companies with stable or increasing cash flow and low debt. Look for companies with these strong fundamentals but that have lagged their industry peers in performance, possibly as a result of poor management.

Clean Harbors, Inc. (NYSE: CLH) pays no dividend despite stable cash flows in the waste management industry and a 2.4% average yield across the group. The company’s focus on industrial and business clients makes it a little more cyclical than peers Waste Management, Inc. (NYSE: WM) and Republic Services, Inc. (NYSE: RSG). Its operating margin of 9.2% is well below the industry average of 17%, while the company has a debt ratio of just 0.9 times equity, just three-quarters of the group’s 1.2 average ratio.

The company operates in four segments: technical services, safety-kleen, industrial and field services, and oil and gas field services. Shares have increased just 1.0% since the beginning of the year, against an increase of 9.5% across the waste management group. The oil and gas field segment may not necessarily fit with the company’s materials management core business and could be a good candidate for a spinoff to unlock value.

The Cheesecake Factory, Inc. (Nasdaq: CAKE) operates 180 restaurants under the company’s name brand, the Grand Lux Café and RockSugar Pan Asian Kitchen. The company also operates two bakery production facilities to provide cheesecakes and other baked goods to the restaurants.

The company’s operating margin of 7.7% is well below the average of 13% for peers. The company holds a debt-to-equity ratio of just 0.2 times in an industry that is normally highly-leveraged and sports a 1.5 average debt ratio. Shares are 6% lower since the beginning of the year, against an increase of 1.4% across the restaurant group.

Activist investors have been looking at the restaurant space recently for its strong brands and stable cash flow. Starboard Value LP has pushed Darden Restaurants (NYSE: DRI) to split off real estate assets and consider other strategic ideas since late 2013. Cheesecake Factory only operates one RockSugar restaurant and 11 Grand Lux Cafes out of the 180 total restaurants and both names may be candidates for a sale.

Ascena Retail Group, Inc. (Nasdaq: ASNA) plunged more than 15% after reporting disappointing earnings results and offering fiscal 2015 guidance lower than consensus estimates on September 23. Same store sales at the company’s Dressbarn and Lane Bryant clothing chains fell 2% over the most recent quarter as CEO David Jaffe pointed to, “continuing soft traffic patterns.”

While other retail names have struggled this year, shares fell nearly 25% in the months leading to September,  against a loss of just 1.7% for the retail apparel industry over the same period. Ascena’s operating margin of 8.9% is well below the average of 12.6% for peers, and the company has a debt-to-equity ratio of 0.1 times, just one-fifth the 0.5 times industry average.

Insiders own 20% of the company with institutional investors controlling another 83% of the shares outstanding. Praesidium Investment Management owns 3.2% of Ascena and could push for strategic initiatives after the recent losses. The company owns a portfolio of apparel names including Justice, Maurice’s, Lane Bryant, Dressbarn and Catherine’s.

Risks to Consider: These companies have underperformed peers and there is no guarantee that an activist investor will be able to turn operations around. Investors need to decide if they want to stick around after activist attention brings an initial pop in the price.

Action to Take–> Look for companies with strong fundamentals but that have underperformed peers for some reason as those that could be potential activist targets. Buy these companies as a part of the speculative portion of your portfolio, profiting from a quick rebound in the shares.

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