Widely known as a corporate raider and activist investor, Carl Icahn views himself as a classic value investor. His company describes the Icahn strategy in simple terms:
"We seek to find undervalued companies in the Graham & Dodd tradition. However, while the typical Graham & Dodd value investor purchases undervalued securities and waits for results, we often become actively involved in the companies we target."
Based on this description, it is easy to understand Icahn's interest in Dell (DELL), a company with more than $12.7 billion in cash, about $7 a share. Potential bids are about $25 billion for the company. That values the operating business with sales of $55 billion and profits of $2.4 billion at about $12.3 billion, about five times earnings.
Herbalife (HLF) is much more difficult to understand. HLF offers an above-average dividend and has a below-average price-to-earnings (P/E) ratio, but the company has a relatively small amount of cash. In SEC filings, Icahn shows that 15 different entities under varying levels of his control are involved in that trade. He also bought 11.5 million call options and offset the cost by selling an equal amount of put options, a bullish options strategy.
While DELL shows the actions of a typical Graham & Dodd investor, HLF may show more of an activist strategy.
In studying the actions of great investors like Icahn, we can learn a great deal about his investment philosophy. The first lesson might be that Icahn is not as diversified as many other investors, with only 16 large companies listed in his SEC filings. Individuals tend to be limited in the number of stocks they can own so Icahn may be a better model than a hedge fund with hundreds of different stocks.
Despite the small number of holdings, the positions are diversified across a number of industries. Icahn's company presentations note, "We are a diversified holding company owning subsidiaries engaged in the following operating businesses: Investment, Automotive, Energy, Gaming, Railcar, Food Packaging, Metals, Real Estate and Home Fashion."
Some investors scour SEC filings to unlock the methods of great investors like Icahn, who has a personal fortune of about $20 billion. I review these filings from a slightly different perspective. The list of stocks Icahn owns is short, but a few of the stocks are bound to be better than others.
Because I have limited trading capital, I developed a system to find the best stocks. This is the same system I ran on the list of Warren Buffett's stocks a few weeks ago.
With Icahn, I found that his stocks offer greater rewards than the S&P 500, an average annual gain of 12.1% a year since the end of 2002, besting the gain of 5.3% from the index.
Right now, the Icahn stock that scores the best in this system is Take-Two Interactive Software (TTWO). This is a company that has reported a loss in five of the past seven years, but has also reported positive cash flow in five out seven years. Despite all of those losses, TTWO has more than $5 worth of cash per share on its balance sheet, an amount equal to about one-third of the stock price.
Take-Two may be a turnround story. Analysts expect the company to report a profit of $0.18 in the current year and $2.26 next year. In the future, they expect average earnings growth of more than 8% a year. At a P/E ratio of 8, TTWO would trade at about $18 a share based on 2014 earnings. The chart below shows that even more gains are possible.
On the monthly chart, TTWO is breaking out of an extended consolidation pattern pointing toward a $19 price target. The weekly chart shows the time to buy is now as the relative strength (RS) rank is at 96.79, meaning TTWO has outperfomed almost 97% of all other stocks in the past six months.
TTWO is a stock that typical value invetsors might overlook but Carl Ichan owns more than 12 million shares, about 14% of the company. His most recent SEC filings show that he was a buyer in the last three months of 2012, after prices recovered from that large dip.
Recommended Trade Setup:
-- Buy TTWO up to $16
-- Set stop-loss at $15, a previous resistance level
-- Set initial price target at $19 for a potential 19% gain in 6-12 months
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- Carl Icahn