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.

There's nothing quite as exciting as a nasty dispute between a company's management and one of its largest shareholders. There's also no dispute between a company's management and one of its largest shareholders quite as exciting as a dispute between a company's management and hedge fund manager Dan Loeb.

Loeb has gained fame for his letters accusing management teams of incompetence using such language as "inexplicable insouciance" (Go ahead. You can look it up. I had to the first time, too.). In a letter to the directors of Nabi Pharmaceuticals last year, he wrote:

"You hide your heads in the nearest warm aperture in an apparent ostrich defense and ignore your shareholders."

In a letter to the (now former, thanks to Loeb) CEO of Star Gas Partners, Loeb wrote:

"It is time for you to step down from your role as CEO and director so that you can do what you do best: retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites. The matter of repairing the mess you have created should be left to professional management and those that have an economic stake in the outcome. "

On February 16th, Loeb fired off a letter to the Chairman, President and CEO of Pogo Producing Company, Paul G. Van Wagenen. Loeb's fund Third Point LLC owns 7.9% of the company. Here are some of my favorite parts:

"Needless to say, we are disappointed by the results but not surprised--given the Company's sad history of failing to meet projections...Not only does Pogo allocate capital poorly, but it seems unable to operate within its stated budgets...Hiring Goldman, Sachs & Co. and TD Securities Inc. to help the Company explore strategic alternatives is a positive step, but we have no faith in the current board's ability to oversee such a process..."

Loeb ended the letter by saying that he intended to wage a proxy fight at the 2007 annual meeting. While most Wall Street insiders can only shake their heads and smile at Loeb's verbally abusive tactics, they certainly draw attention to his causes. The media spotlight that his beautifully-worded tirades draw to the performance of management leads many investors to Loeb's conclusion: These guys have got to go.

Loeb's penchant for verbal sparring does not end with the executive he targets. It also extends to those unfortunate enough to seek employment at his firm without playing by his rules. Take a look at some of the highlights of this gem of an email exchange. When a prospective hire declines Loeb's request for his "3 best current European ideas," things get interesting.

Loeb: "We find most Brits are a bit set in their ways and prefer to knock back a pint at the pub and go shooting on weekends rather than work hard. Lifestyle choices are important, and knowing one's limitations with respect to dealing in a competitive environment is too. That is Lesson One at my shop. It is good that we learned about this incompatibility early in the process, and I wish you all the best in your career in traditional fund management."

Lewis: I am half-American and half-French, and having spent more than half my life on this side of the pond I think I know a little something about how one conducts business in the U.K. and Europe.

Loeb: Well, you will have plenty of time to discuss your "place in society" with the other fellows at the club. I love the idea of a French/English unemployed guy, whose fund just blew up, telling me that I am going to fail.

At Third Point, like the financial markets in general, "one's place in society" does not matter at all. We are a bunch of scrappy guys from diverse backgrounds (Jewish, Muslim, Hindu etc.) who enjoy outwitting pompous asses, like yourself, in financial markets globally.

Your "inexplicable insouciance" and disrespect is fascinating; it must be a French/English aristocratic thing. I will be following your "career" with great interest.

Legendary investor Carl Icahn has acquired 1.39% stake in Motorola, Inc. (NYSE:MOT), and asked for a seat on the company's board of directors. With stock trading 30% off its 52-week high and a 48% profit decline in the company's fourth quarter profit, some believe that Icahn will attempt to break-up or otherwise restructure the company.

Currently perched at number 24 on the Forbes list with a net worth of $9.7 billion dollars, Icahn is famous for his activist investments in companies including TWA, Blockbuster Inc. (NYSE:BBI), ImClone Systems Incorporated (NASDAQ:IMCL), Mylan Laboratories Inc. (NYSE:MYL), and, most recently Time Warner Inc. (NYSE:TWX).

If Icahn's goal is to break-up the company, analysts predict that he will encounter resistance from management. If that happens, this could get very interesting. Watching people like Carl Icahn doing battle with corporate management teams is good entertainment... not quite as much fun as watching Dan Loeb at work though.

If you enjoy following the comings and goings of activist hedge funds like Third Point and Pirate Capital, you will definitely want to bookmark the StreetInsider.com 13D Tracker. Every time an investor acquires more than 5% of the outstanding shares of a publicly-traded company, they are required to file a Schedule 13D form with the Securities and Exchange Commission. In the form, you can find important information such as how many shares they acquired and what they plan to do with their shares (were they acquired just for investment or does the fund plan to lobby for changes in the business?).

Most exciting, some investors will attach an "open letter" to the company in the 13D filing. Dan Loeb of Third Point is most famous for his diatribes, including this gem to the CEO of Star Gas Partners, L.P (NYSE: SGU), Irik Sevin, a few years ago: "It is time for you to step down from your role as CEO and director so that you can do what you do best: retreat to your waterfront mansion in the Hampton's where you can play tennis and hobnob with your fellow socialites. The matter of repairing the mess you have created should be left to professional management and those that have an economic stake in the outcome." To read more about Dan Loeb, go here to download an excellent piece from Bloomberg Magazine.

While you can of course view the 13D filings yourself in the SEC's Edgar database, the 13D Tracker provides a concise overview of the most interesting ones, along with background information.