By Svea Herbst-Bayliss and Jennifer Ablan
(Reuters) - Activist investor Carl Icahn on Monday said there was a chance the stock market could suffer a big decline, saying valuations are rich and earnings at many companies are fuelled more by low borrowing costs than management's efforts to boost results.
Unnerved by Icahn's prognosis, investors pushed stocks lower. The S&P 500, which was trading near unchanged before Icahn spoke, closed down 0.4 percent.
"I am very cautious on equities today. This market could easily have a big drop," Icahn said.
He said share buybacks are driving results, not profitability.
"Very simplistically put, a lot of the earnings are a mirage," Icahn told the Reuters Global Investment Outlook Summit. "They are not coming because the companies are well run but because of low interest rates."
He also hinted at his ongoing plan for Apple Inc (NSQ:AAPL), the most valuable U.S. company by market value, saying he does not want to fight with management at the iPhone giant but has no plans to walk away from his investment.
Shares of Apple closed down 1.2 percent at $518.92 (£322.09); they were trading at $523.11 before Icahn's remarks. Icahn said he still thinks Apple's stock price is undervalued and said the company's CEO, Tim Cook, feels the same way.
Icahn, who runs Icahn Enterprises (IEP.O), a diversified holding company, is urging Apple to buy back $150 billion worth of shares. The company has not committed to that. Icahn owns approximately 0.4 percent of Apple's outstanding shares, according to Thomson Reuters data.
Icahn said that he and Cook are friendly, but he still spoke critically. "Apple is not a bank and it should not be run like a bank because investors did not invest in a bank," he said. "Apple has all this money, they should be using it."
Known for decades of strong-arm tactics, including proxy fights, Icahn was diplomatically vague about exactly how he planned to proceed in his efforts with Apple. He did joke that if Reuters reporters had joined him for a cocktail, he might have said more.
The 77-year-old investor's views on markets and individual companies are widely followed in light of the strong returns he has generated.
Icahn said that in the last five years, investors who bought shares of companies in which his firm took seats on the board of directors and held the shares as long as an Icahn representative stayed on those boards would have earned 28 percent on an annualized basis.
Icahn is known as one of the market's most powerful activist investors. But he said he and his colleagues do not want to micro-manage corporations. He prefers to speak with top management and "set up parameters" for performance, such as return on equity or performance against competitors.
"Boards should be keeping the CEO accountable," Icahn said, adding, "that's what a board should do."
Activism has become a hot-button topic in the hedge fund industry this year, in part because returns at activist funds are roughly 14 percent, nearly twice as strong as gains at the average hedge fund.
While he pointed to a handful of managers who practice activism well, Icahn took a swipe against William Ackman, whose Pershing Square Capital Management is one of the industry's biggest activist managers, with average annual returns of 20 percent over the last decade.
"What we don't do is exactly what Ackman does do. We may have an idea, but we never push it," Icahn said.
Ackman and Icahn have engaged in a very public battle on their opposing views of Herbalife (HLF.N), the nutrition and supplements company. Ackman took a large short position in Herbalife, while Icahn bet the company's share price will rise, which in fact it has.
Ackman also made waves in his aggressive push to overhaul retailer J.C. Penney (JCP.N), but finally sold his 18 percent stake in the company earlier this year, losing hundreds of millions of dollars, after his campaign failed.
But Icahn sang the praises of other activists, including Keith Meister, his one-time lieutenant who now manages Corvex Capital. Jeff Ubben's ValueAct, which was instrumental in forcing change at Microsoft (NSQ:MSFT), also got high marks, as did Daniel Loeb, whose Third Point, won big at Yahoo (NSQ:YHOO) where he helped install Marissa Mayer as CEO last year.
Icahn said he had looked at investing in Microsoft but did not, declining to give a reason.
(Additional reporting by David Gaffen; Editing by Dan Grebler and Leslie Adler)