I love following the moves of activist investors by tracking their portfolios on StockPickr.com and reading their arguments and analysis in SEC 13D filings. One of my favorite activists to follow is Dan Loeb of Third Point. Loeb is known for his well-written, to-the-point letters to greedy managers which are seen and read by investors all over. According to StockPickr.com's portfolio page for Dan Loeb, Third Point has "posted an average annual return of 28.9 percent since Loeb founded the firm in 1995." Due to the entertainment (and potentially profitable ideas!) provided by Dan Loeb, I have found myself covering one of his letters since my return to writing, his letter to the management of Acorda. Another Third Point position I am closely following is Flow International (NASDAQ: FLOW).

Flow International is a UHP water pump company. What exactly are UHP water pumps? Basically, these are high pressure (40,000-87,000 psi) water pumps used to cut and clean various materials. Using a UHP water pump to cut is viewed as being more flexible than other cutting methods (e.g. lasers, saws) because it can cut more materials and it cuts without heat. In addition, there are benefits to using UHP water pumps in industrial cleaning, paint removal, and so on. For example, there are usually fewer environmental concerns in using water pumps compared to older, traditional methods such as sandblasting. Due to the benefits of UHP water pumps when compared to their traditional alternatives, the upside of the entire market seems very bright.

The growth in FLOW's underlying fundamentals has been fairly significant during recent years. First, the company had its first year of positive net income in 2006, earning roughly $6 million. 2006 also showed a roughly 100% increase in EBIT when compared to 2005 figures. While $6 million in net income seems rather insignificant for a company with a market cap of $445 million, what's important is the company's future. I believe the company has significant earnings potential over the next few years and the six analysts following the company seem to agree. For 2007, the average analyst estimate is 39 cents per share (on $226 million in sales). This would represent an increase in roughly 50% for EPS.

However, there was a rather significant news development recently: the company's President and CEO Stephen Light said he plans on retiring after the completion of fiscal year 2008. And it was this decision that sparked a 13D filing from Dan Loeb's Third Point, a 13.6% owner of Flow.

According to Loeb, Third Point began purchasing shares of Flow two years ago because of the firm's view about the company's "fundamental strength" and "target market and technology," as well as the firm's confidence in Stephen Light based on "his record of success in his previous career with much larger companies, as well as his keen analytical ability and communication skills." Because of this development, Loeb believes the company should "be sold, rather than seek to continue operating." However, the most interesting part of this whole letter was Loeb's statement that "we believe a sale could be accomplished at a significant premium to the current market price," due to the fund's discussions with industry participants as well as a financial advisor.

Due to the immense benefits of the company's products, as well as the bright activist advocating a sale at a "significant premium," I believe Flow Industries is a very interesting prospect.