Should You Invest With Carl Icahn?

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Carl Icahn may not be as famous as Warren Buffett, but he is one of the best value investors in the world. He has an outstanding long term track record in the markets, built through years of contrarian investing and shareholder activism, a ruthless corporate raider who is not afraid to go against management when trying to unlock value and extract benefits from his positions.

Investing with Icahn is not easy, and certainly not for the faint of heart, but it does offer the potential to achieve market beating returns in the long term.

A Tough Guy

Viewers enjoyed one of the most interesting moments in the history of financial TV last week, when Icahn called CNBC’s Fast Money Halftime Report to get into a fierce 30 minute discussion with hedge fund manager Bill Ackman regarding shares of Herbalife. Actually, the argument was about much more than that; the two billionaires have a long-standing dispute regarding a legal battle from years ago, and Icahn left subtleties aside during the discussion.

Icahn described Ackman as “a crybaby in the schoolyard” and “a major loser,” saying about his abilities as an investor, or lack of thereof: “I wouldn’t invest with you if you were the last man on Earth.” This may not be good business etiquette, and probably not fair to Ackman either, but it shows Icahn as he is: frontal and decided in his opinions and actions.

Icahn has made a fortune for himself and his investors by making big bets in undervalued securities. He is also a coldblooded activist when it comes to pushing for strategic restructurings or management changes if he believes that´s the way to go. Icahn may not be a kind guy, but he is certainly a successful investor.

According to Kiplinger, Icahn has even done better that Warren Buffett himself over the last years:

Icahn, 76, is arguably one of the great value investors of all time, and by one key measure may be an even better investor than Buffett. From 1968 through 2011, Icahn compounded the initial $100,000 he invested in his Wall Street firm at a 31% annual rate. Over the same period, the book value of Buffett's Berkshire Hathaway grew 20% annualized.

Icahn Enterprises

Icahn Enterprises (NASDAQ: IEP) is a holding company which has operations in investment, automotive, gaming, railcar, food packaging, metals, real estate and home fashion. The most prolific and interesting segment of the company is investment management, which has been responsible for the biggest share of the firm´s profits over the last years.

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There are many similarities between Icahn Enterprises and Buffett´s Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B). Both companies include operating subsidiaries and an investment management business, and they are also very unique in the sense that they are managed by investing luminaries.

Being smaller and more aggressive, Icahn Enterprises has outperformed Berkshire in terms of book value per share over the last years, and they are both trading at similar valuations in the area of a price to book value ratio near 1.3.

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Investors need to consider, however, that Berkshire is much safer since it benefits from the stability and recurrent profits provided by its insurance and utilities operations, among other operating segments. Buffett leverages the cheap financing produced by the insurance business to invest in low risk, high quality, companies. He has built in Berkshire a rock solid fortress that can withstand any kind of economic hurdles.

Icahn Enterprises is much more exposed to the results from the investment management business, and in that sense it can be much more volatile. The upside to this bigger volatility is superior return potential.

Piggybacking Icahn

You don´t need to invest in Icahn Enterprises or in one of his investment funds to benefit from Icahn´s talent. The corporate raider is usually quite vocal about his positions, and the financial press follows his moves closely, so it’s quite easy to piggyback his stock picks.

Icahn owns a 10% position in Netflix (NASDAQ: NFLX), which he acquired for around $58 per share via call options last year. The investor is sitting on a big fat gain at the current market price above $165, and Netflix has reported blowout earnings for the last quarter, so this may provide some peace for Reed Hastings and his team as long as the company continues performing well.

However, Icahn has been very explicit about his point of view: Netflix should be sold at a considerable premium to a bigger player like Amazon or Microsoft.  "There is a very good argument that, at the right premium, somebody should buy Netflix," said Icahn to the Wall Street Journal. "They've got a great platform. That is also why it is such a great acquisition candidate for someone”.

He has a good point: the company has an incredibly valuable leadership position in the online streaming business, but content is expensive and Netflix is under financial pressure. An acquisition would provide the acquirer with a fantastic growth opportunity, and Netflix could get the resources it needs in order to pay for content and finance international expansion.

As long as it doesn´t lose its innovative drive, Netflix could be worth more as part of a larger organization than on a standalone basis, so investors in the company had good reasons to feel comforted by the fact that Icahn will push for a deal if Netflix fails to deliver.

Chesapeake Energy (NYSE: CHK) is another good example to consider. The company is a major player in the booming US natural gas industry, but it has a lousy track record when it comes to corporate governance and capital allocation. Icahn has bought around 9% of the company, and he is fighting for some important changes at the top, as well an asset restructuring.

The good news is that he seems to be winning. The company´s controversial CEO Aubrey McClendon announced his departure last Wednesday, and the stock rose more than 6% in response. McClendon is under an internal board investigation regarding personal loans he allegedly obtained using minority stakes in company-owned wells, so this seems like a step in the right direction to defend the best interest of shareholders.

Considering Chesapeake’s management missteps over the last years, it´s not a far stretch to say that the company would be more valuable if it had a better management team, and having Icahn on board can certainly help in that aspect.

Bottom Line

Icahn may not be as popular as America´s most beloved billionaire, Warren Buffett.  He is probably underappreciated because of his rough manners and combative attitude, but nobody can deny his extraordinary track record and investment expertise. If you can withstand short term volatility and you feel represented by his contrarian investment strategy, there are some solid reasons to invest alongside this tough guy.

acardenal owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway and Netflix. The Motley Fool owns shares of Berkshire Hathaway and Netflix and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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