Should We Follow Carl Icahn's Recent Investments?

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

Carl Icahn is a legendary activist investor, there’s no doubting it. When Icahn announces an investment in a firm he is joined by hoards of followers, and even manages to scare a few board members along his way. Over time, Icahn has made quite a pretty penny with his investments in Motorola and KT&G. It’s too late to go buying Motorola stock and play along with him, but there are some more recent investments that you could join him in.

Let’s take a look to see if we can see the same things in the recent Icahn picks Netflix (NASDAQ: NFLX), Transocean (NYSE: RIG), and Hearbalife (NYSE: HLF).


We might as well get this started with Herbalife, a very controversial stock as of late. The company has been called a “pyramid scheme” by another prominent investor, Bill Ackman. After Ackman made public his short position in the company its stock began to tank, taking it from around $42 per share all the way down to $24 and change. Since then, the company has revitalized and defended itself and is back up to pre-short levels. Is it worth getting into now, though, like Carl Icahn has just done?

First thing to do is explore what exactly the company does. Herbalife is essentially a product marketing company. They take nutritional supplements and personal care products and sell them through affiliates. The reason that Ackman called it a pyramid scheme is that he believed it suckered people into signing up and buying large quantities, and these people could then get others to sign up to make more money. When I went through Ackman’s presentation I could really see where he was coming from in his argument.

So if Ackman thinks it’s so bad it deserves to go bust, what could Carl Icahn see in it? Definitely potential after the big drop, especially if Ackman turns out to be wrong. Icahn bought up 8% of the company and he’s sitting on it as we speak. Can you get in on the company now? Or had the ship sailed before Icahn announced his position?

Herbalife has a current P/E ratio of 11.64, significantly below the S&P's average ratio. The company also pays a dividend, which yields 2.7% at current pricing. Earnings, the thing that keeps our stock ticking up, are also on the rise at Herbalife; revenue has seen 12.19% growth annualized over five years, while EPS growth at the company has also been shooting up at a five year annualized 23.85%. For those interested in the dividend, that keeps going up as well--the dividend at Herbalife has grown at an annualized rate of 26.82% over the last five years!


So, what’s going on with Icahn and Netflix? Well, like many companies he has tried to buy and change in the past, Icahn is doing the same here. Netflix even decided to implement a poison pill mechanism to keep any Icahn antics at bay for the foreseeable future.

Icahn made a great buy on Netflix. He has likely made 30% or more on his investment, as the stock is up around 50% over the last three months. His original goal was to get the firm to sell itself, but it would seem that the board of Netflix are totally against the idea. Icahn may instead choose to dump his position in this company, at the aforementioned profit, and continue on to greener pastures.

If, as an investor, you’re looking into Netflix for a potential investment I’d definitely say to stay away. I believe Icahn offered Netflix the best solution and they turned it down. This company is in play for those who believe it has a chance of being acquired. I said it in a post before, and I’ll say it again, the content that Netflix offers is not worth the price they ask for it. Amazon will step up to the plate over the next year in the United States and give Netflix something to worry about. And what about Coinstar and Verizon? Those two companies teaming up need to be taken into account too.  

Netflix has a P/E ratio up in the stratosphere at 123.39, their revenues have been growing as more traction has been gained, but their EPS is about as reliable as a chocolate fireguard. There’s no dividend at the company and there’s very little chance of ever seeing one. The one and only positive outcome I see for this company is acquisition.


Transocean is one of Icahn’s more recent plays, and it is a very interesting one. The company is an offshore drilling contractor, and you may remember them from the Gulf oil spill fiasco right alongside BP. Icahn has only picked up a mere 1.56% of this company so far, but he could be looking for more, which makes this a good time to investigate the company to see if it is worth a buy.

Over the last two years Transocean has lagged the market significantly. The company is down more than 30%, which could definitely be attributed to the Gulf disaster aboard the Deepwater Horizon. With the court cases on the oil spill being closed up and Transocean having to write down losses of over $19 per share in the last quarter to cover fines, we could finally see this company coming back to life.

It isn’t just Icahn that believes so, either; Citadel Investment owns a fair share, as does Capital Advisors. Both firms have big names running them and definitely know what to look for in a deal.

As for the financials at Transocean, I definitely like the look of their five-year PEG ratio, which sits at 0.5. Such a low ratio means that even if analysts are predicting earnings of double what Transocean puts up, it is still a good buy. The P/E at Transocean is currently negative due to the $19 per share loss in the last quarter. Analysts estimates make the forward P/E come out to be somewhere around 11.

While we don’t know what exactly Icahn has in store for Transocean, I believe it is a solid buy. With the low price multiples, the lawsuits behind them, and lots of ocean still to drill, this is a company for the future. 

Ash1402 has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix and Transocean and has the following options: Long Jan 2014 $50 Calls on Herbalife Ltd.. 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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