How To Invest Like Carl Icahn


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Understanding The Mindset Of Carl Icahn

The man who inspired the character of Gordon Gekko in Oliver Stone’s 1987 film Wall Street is Wall Street legend Carl Icahn. Icahn is known as a corporate raider and as a shareholder activist. A corporate raider identifies companies whose shares he or she thinks are undervalued, a strategy known as value investing. They then buy a large number of shares, which gives them voting rights, and they use those rights to push for changes in the company’s management and operations.

Those changes can lead to increased share value, which can net the corporate raider enormous returns or even the company itself. Control of a company means the corporate raider can sell it or combine it with another company in a merger. Companies that have recently rejected acquisition offers that corporate raiders think were fair often become targets of those raiders.

Identifying Value Investment Opportunities

The characteristics of companies that may present value investment opportunities are:

  • They have a lower valuation than their assets or financial metrics–including earnings, revenue and cash flow–would indicate.
  • They are often well-established businesses with histories of consistent profitability.
  • While their growth may be slow, they have experienced few contractions and they have stable revenue streams.
  • They often pay dividends.

Identifying value investments takes research, combing through companies’ filings and balance sheets. It also helps to know the basics of how to value a company and how to assess its future prospects.

Once corporate raiders are able to tinker with a company, they may divest certain assets or business lines to unlock value or to eliminate a drag on the company’s bottom line. This can result in unwelcome reductions in head count, but Wall Street has come to view corporate raiders as a necessary counterbalance to the poor management of some publicly traded companies.

While you probably can’t take control of companies, you can still use the same strategy of looking for value stocks. You can also buy shares in the same stocks that Icahn is buying.

Mispriced stocks are hiding in plain sight and present great investment opportunities for the remainder of 2023. Forbes’ top investment experts share 7 overlooked stocks in this exclusive report, 7 Best Stocks To Buy For The Second Half of 2023. Click here to download it now.

Activist Investing: Unleashing The Power Of Influence

News of Icahn’s interest in a company often leads to other investors following his lead, which causes an increase in the stock price. This phenomenon is known as the “Icahn lift.”

Shareholder activists, also known as activist investors, buy a stake in a company then exercise their rights as partial owners to influence a company’s management and board of directors. Activist investors may threaten lawsuits or they may present formal proposals to all shareholders during a company’s annual meeting. Besides Icahn, another notable shareholder activist is Bill Ackman. Beginning in 2012, Icahn and Ackman squared off in a titanic battle over the nutritional supplement company Herbalife. (I’ll be writing about Ackman in a coming article, but first a little background on Icahn.)

Icahn was born in 1936 and became the first student at his high school in Far Rockaway, Queens, New York to attend an Ivy League college. Icahn graduated from Princeton University in 1957, and attended two years of medical school at New York University before joining the army. Following his discharge, Icahn became a stockbroker.

In 1978, Icahn’s first takeover target was stove manufacturer Tappan. Icahn invested $2.7 million in the company, got a seat on Tappan’s board of directors, then sold Tappan to Swedish company AB Electrolux, doubling his investment.

In late 1985, Icahn acquired 50% of the shares of Trans World Airlines (TWA). In 1988, Icahn took TWA private through a $650 million stock-buyback plan that, while returning almost Icahn’s entire $469 million investment, saddled TWA with $540 million in debt. In 1991, Icahn sold half of TWA’s valuable London routes to American Airlines, and in 1992 TWA declared Chapter 11 bankruptcy, emerging the following year.

TWA still owed Icahn $190 million, which he agreed to accept in the form of flight vouchers. Contractually unable to sell those vouchers through travel agents, Icahn instead founded internet company and sold the vouchers there. Today, is part of Booking Holdings (BKNG), owner of Priceline, Kayak and OpenTable.

In July 1995, Icahn started buying shares of RJR Nabisco at around $30. Icahn felt the company could benefit by separating its food and tobacco businesses, with the food arm being dragged down by smoking-related lawsuits. In February 1997, Icahn sold his 7.3% stake to Goldman Sachs at a slight discount from the closing price of $37.75, netting a $125 million profit.

In November 1996, Icahn bought a large stake of Marvel Comics’ bonds when they dropped in value following the company entering Chapter 11 bankruptcy reorganization. Those bonds were backed by shares of Marvel that belonged to financier Ronald Perelman, and Icahn wrested control of Marvel from Perelman, replaced the board of directors and declared himself chairman.

In 2004, Icahn raised $3 billion to form hedge fund Icahn Partners and he took ownership stakes in Blockbuster Video, Time Warner, Mylan Laboratories and Hollywood Entertainment. In early 2005, Icahn bought 10 million shares of Blockbuster, becoming its largest shareholder, then launched a proxy fight. By March 2010, Icahn had sold most of his Blockbuster shares and incurred a rare loss of $180 million.

In March 2011, Icahn returned all the outside investors’ money in his hedge funds, and in October 2013, Icahn earned more than $800 million from the sale of most of his stake in Netflix.

In 2016, after Icahn took a stake in Donald Trump’s floundering casinos in Atlantic City, New Jersey and Trump Entertainment Resorts became a subsidiary of Icahn Enterprises. Following Icahn’s support of Trump in the 2016 election, Trump named Icahn a “special adviser” on regulatory reform. In August 2017, just before the publication of an article that claimed Icahn had sought a regulatory change that would have benefited one of his investments, Icahn resigned his appointment. The bad news continued when rental car company Hertz filed for bankruptcy and Icahn sold his 39% stake in May 2020 for a $2 billion loss.

In 2012, Bill Ackman’s hedge fund Pershing Square Capital announced a short position in nutritional supplement company Herbalife (HLF), with Ackman saying the multilevel marketing company was a “pyramid scheme.” Within three days, Herbalife’s stock dropped by 20%, but the danger is always that a counterparty will take the other side of the short, and in a filing Icahn revealed that he had taken an enormous stake in Herbalife, eventually owning 26% of the company.

In November 2017, after Herbalife’s stock was up 51% for the year, Ackman closed out his short position, converting it to a put position. In all, Icahn earned approximately $1.3 billion from his Herbalife bet, while Ackman lost nearly $1 billion.

Mispriced stocks are hiding in plain sight and present great investment opportunities for the remainder of 2023. Forbes’ top investment experts share 7 overlooked stocks in this exclusive report, 7 Best Stocks To Buy For The Second Half of 2023. Click here to download it now.

The Art Of Timing: Recognizing Market Opportunities

The primary ways of recognizing market opportunities are by:

  • Noting bull and bear markets, also known as primary markets, whose duration is usually one to three years.
  • Analyzing secular trends that can have durations in the decades; an example of a secular trend is the movement of the S&P 500, which shows almost steady growth from the 1980s to the year 2000 before tapering downward.
  • Searching for intermediate trends within primary trends; intermediate trends can include sudden rallies or abrupt turnarounds that are often the result of a political or economic event.
  • Looking at the history of the markets; typically there are strong rallies and weak reactions during bull markets, and there are strong reactions and short rallies during bear markets.

Risk Management: Protecting Your Investments

Value stocks, like those chosen by Carl Icahn, usually carry lower risk because they are older, established companies. However, value investing takes patience because it can take years before the market recognizes the value and reprices the stock.

Learning From Mistakes

While in his long career, Carl Icahn has had plenty of wins and losses, a May 2, 2023 report by forensic financial research firm Hindenburg Research may indicate one mistake too many. Entitled, Icahn Enterprises: The Corporate Raider Throwing Stones From His Own Glass House, the report includes the following findings:

  • Units in Icahn Enterprises (IEP), a closed-end holding company, are inflated by over 75%, trading at a 218% premium.
  • IEP’s investors are attracted to its large dividend yield of approximately 15.8%, the highest dividend yield of any U.S. large-cap company.
  • That dividend is not supported by IEP’s investment performance, which dropped almost 53% since 2014, or by its cash flow which dropped by $4.9 billion over the same period.
  • Despite these losses, IEP has raised its dividend three times since 2014, with quarterly distributions reaching $1.75 – $2.00 per unit in 2019.
  • Icahn Enterprises has been selling units through at-the-market (ATM) offerings, and according to Hindenburg “has been using money taken in from new investors to pay out dividends to old investors,” which is the classic definition of a Ponzi scheme.
  • In what Hindenburg describes as, “one of the worst cases of sell-side research malpractice we’ve seen,” investment bank Jefferies’ has stated that IEP’s dividend will be safe “into perpetuity,” since 2019, Jefferies has been selling all of IEP’s units.
  • IEP’s last year-end NAV of $5.6 billion is inflated by at least 22%, with units currently trading at a 310% premium to NAV, and with an annual dividend rate of 64% of NAV.
  • In January 2020, investment bank UBS ended its coverage of IEP citing a “lack of transparency,” while Hindenburg’s analysis of IEP’s long holdings showed a loss of approximately $471 million.
  • 85% of Icahn’s overall net worth is in IEP, and he has pledged 181.4 million units, or approximately 60% of his IEP holdings, for personal margin loans.
  • Hindenburg’s conclusion is that Icahn has taken on too much leverage given his losses.

As Forbes reported, as a result of Hindenburg’s report, Icahn Enterprises units dropped 20% the day after the report, shaving $3 billion from Icahn’s fortune and dropping his net worth by another $3.6 billion.

Carl Icahn FAQs

How did Carl Icahn make his fortune?

Icahn made his fortune through aggressive tactics in corporate takeovers and through activism.

What is Carl Icahn’s investment strategy?

Icahn finds undervalued companies, acquires large stakes in them, and forces changes in their operations and management.

What are some of Carl Icahn’s notable successes?

Icahn’s notable successes include TWA, TimeWarner, Netflix and Herbalife.

Is it possible for individual investors to invest like Carl Icahn?

Yes, by avoiding “hot” stocks and by looking for businesses that the market is ignoring.

What are some common mistakes to avoid when investing like Carl Icahn?

Avoid companies that look like promising value investments but fail to increase in value.

Mispriced stocks are hiding in plain sight and present great investment opportunities for the remainder of 2023. Forbes’ top investment experts share 7 overlooked stocks in this exclusive report, 7 Best Stocks To Buy For The Second Half of 2023. Click here to download it now.

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Nicole Lambert
Nicole Lambert
Nicole Lamber is a news writer for LinkDaddy News. She writes about arts, entertainment, lifestyle, and home news. Nicole has been a journalist for years and loves to write about what's going on in the world.

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