Carl Icahn's Icahn Enterprises LP is seeking to raise $270 million. It's tripled in price over the past year but has it gone too far?
Billionaire activist investor Carl Icahn wants your money.
Okay, it's his Icahn Enterprises that's going to the markets, seeking to raise additional funds through the sale of an additional two million depositary units in the limited partnership. The announcement caused shares to drop from over $144 per unit to below $136. Still, this new offering will give Icahn more than $270 million to invest.
To be sure, Icahn Enterprises owns chunks of stocks that have had homeruns this year.
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And, Icahn's returns have been stellar, something he likes pointing out. When Icahn Enterprises released its quarterly numbers, Icahn touted:
"I believe that by far the best method to utilize in investing is the 'Activist' model. I have spent a great deal of time and effort perfecting its use and I am happy to say that IEP has been a beneficiary of this. An investment in IEP stock made at the beginning of 2000 has increased by approximately 1,500%, or an average annual return of 22%, through October 31, 2013. But perhaps more compelling is that since April 1, 2009, when the economic recovery started: 1) an investment in IEP stock resulted in a total return of 347%, or an average annual return of 39%, through October 31, 2013, and 2) IEP's indicative net asset value has increased during this period by 282%, or an average annual return of 35%, through September 30, 2013. Most importantly to current IEP unit holders is that in my opinion there has never been a better time than today for activist investing, if practiced properly."
So, while $270 million in additional units isn't much compared to the total value of the partnership, Icahn may not need the money as much as he needs more units to be traded.
The thing about the $15.5 billion Icahn Enterprises is that it's very tightly controlled. Icahn owns 88.2% of the current 113.9 million units outstanding. Another 5.4% is held by Citigroup and Horizon Kinetics. But, only about 10.25 million units (about 9% of the total) are floating in the markets. Adding the proposed two million units will increase the float by 19.5%.
Why's that important? Because more float means more liquidity which means more stability in the price of the partnership.
But, there could be another reason Icahn is selling: Because the partnership may be overvalued. While it may have been trading at a discount to its net asset value (NAV) earlier in the year, a run-up in the price of the units may have well overshot their value. A little over a month ago, the NAV based on Icahn's investment was estimated to be $78 per unit, about two-thirds what they were trading for at the time. Icahn Enterprises' units have since gone up about 30%.
"He has a tremendous track record that's obviously what he's selling on," says CNBC contributor Gina Sanchez, founder of Chantico Global. "The challenge with this particular offering is he is cashing in at quite a high level relative to the NAV. That basically suggests one of two things: either he's raising money so he can deploy more capital and make more investments or he's cashing out and stuffing [retail investors]."
"I think it's probably worth something," says Sanchez about Icahn Enterprises. "But, it is definitely worth looking at how much money this is raising relative to actual value of the fund. I think that there is some caution that should be taken here."
Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, doesn't believe investing in Icahn Enterprises is a good idea.
"Broadly speaking, when the most important investor in America (according to Time magazine) is a seller, you don't want to be a buyer," says Ross looking at a six-month chart of the partnership. "When you have a chart like this, you definitely do not want to be a buyer."
Two months ago, the stock began trading significantly above its 200-day moving average, notes Ross. At the time, that technical indicator was just about at the stock's NAV. The quick jump in the price of the partnership – 61% in the last two months – is just too much, according to Ross.
"Adding more shares to the market and increasing liquidity is good in the long-term to health of the stock, but that's what's going to bring the stock back down," says Ross. "To a certain degree, part of this run has been generated by the fact that there are so few shares out there."
"I would let the dust settle," recommends Ross. "I would not be a buyer at these levels."
To see the rest of Sanchez's fundamental analysis and Ross' technical take on the charts for Icahn Enterprises, watch the video above.
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