How Carl Icahn is Handling the Current Market Volatility

Back in early October of last year, I said individual investors would be well-served to follow the trading activity of shareholder activist and hedge-fund titan Carl Icahn. Icahn’s success as an investor has pushed his net worth to an estimated $12.5 billion and to an enviable standing as the 23rd the richest American, according to Forbes. I discussed a number of the companies he was targeting at the time, and many have handily beaten the market in the past 11 months.

More recently, as is required by the Securities and Exchange Commission (SEC) every quarter, Icahn’s hedge funds released their second quarter 2011 13-F filings. With the release was useful insight on his current moves.

As for the past activity, since October, Icahn Enterprises (NYSE: IEP) has jumped nearly 15% and is handily beating the market’s slightly negative return in this same period. As a reminder, Icahn Enterprises is basically Icahn’s personal investment vehicle. He owns in excess of 90% of the underlying common stock and his total stake is worth close to $2.5 billion. The businesses held in Icahn Enterprises include interests in an array of companies such as metals, real estate and home fashion. As I mentioned previously, Icahn Enterprises is a complicated company with many moving parts, so trying to get to the most accurate valuation possible of all of the pieces is tricky, at best.

To further make matters interesting, in addition to Icahn Enterprises, Icahn runs or is affiliated with a number of hedge funds. These include those with his name, such as Icahn Capital LP and Icahn Management LP. Despite this seemingly convoluted investment empire, there is a ton of useful information to be gleaned from his quarterly activity.

Perhaps the biggest news in Icahn’s portfolio was the split of technology firm Motorola’s operations into two separate companies: Motorola Solutions (NYSE: MMI) and Motorola Mobility Solutions (NYSE: MSI). Then, in August, Google (Nasdaq: GOOG) announced its intention to acquire Motorola Mobility for $40 a share, or about $12.5 billion. This was a 63% premium to the share price the day before the announcement, meaning anyone who chose to ride Icahn’s coattails on the pick likely racked up huge gains.  

Quarterly activity from the most recent August 15 filing details a new investment in truck and defense vehicle manufacturer Oshkosh Corp. (NYSE: OSK). Icahn Capital LP, one of Icahn’s hedge funds, owns about 2 million shares for a current market value of nearly $60 million.

Oshkosh Corp. has significant potential for share-price gains.  The fact that Oshkosh has been beaten down by an overall decline in the stock market could suggest it is ready to move, especially once Icahn is able to meet with management and discuss his intentions for the company.  Even without Icahn’s involvement, the stock trades at a rock-bottom price-to-earnings (P/E) multiple of 6. In addition, Oshkosh’s operations should see a big uptick in demand for its construction vehicles and industrial equipment.

Notable sells include the elimination of biotechnology concern Biogen Idec (Nasdaq: BIIB) and leading toy maker Mattel (NYSE: MAT). Icahn doesn’t make a habit of providing his motivations for making trades, but he posted gains of nearly $1 billion from the sale of Biogen. The stock has jumped more than 30% so far this year.

Icahn made two other big moves during the second quarter. He sold 14.3 million shares of Forest Labs (NYSE: FRX) for a total quarter-end position of nearly 16 million shares, or $573 million. He has been in a high-profile dispute with management and has been advocating that the company spend more to develop its drug portfolio. More than 80% of sales could evaporate in the next couple of years when the drugs Lexapro (used to treat depression) and Namenda (for Alzheimer’s) lose patent protection. Icahn has been pushing for more aggressive ways to offset these lost sales and recently nominated his own directors to be on Forest Labs’ board. 

Even though Icahn is selling shares, I think Forest Labs continues to have big upside potential. It trades at a low P/E multiple of 8 and could be acquired by a larger pharmaceutical rival for its drug pipeline and $4 billion cash position.

Icahn also reduced his holding in Take-Two Interactive Software Inc. (Nasdaq: TTWO) by nearly 50%, selling 4 million shares. The remaining stake as of quarter end was 5.8 million shares for a market value of $62 million. Icahn has roughly doubled his money in Take-Two, according to most estimates. Again, he has taken an activist stake in this company and controls three board seats, but with the recent sales, it is believed he is backing off his intent to have the company bought out by a rival.   
Action to Take —> Icahn has an impressive amount of companies he is targeting to enhance shareholder value. Simply having his name associated with a stock can cause its price to move up significantly. Icahn may not always get the end result he is pushing for, but his presence is immediately felt at the companies he targets. Of course, investors must also determine whether the companies he pursues are solid holdings on their own, but I think Oshkosh and Forrest Labs are two stocks to put on your watch list.

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