Carl Icahn's Way: Netflix And Navistar

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Following a great investor in action is always interesting and often informative. While blindly copying their lead is not recommended, reviewing their methodology and technique can provide valuable clues that will help any investor.

Carl Icahn is a great investor that I follow closely. He first came into the public spotlight in the 1980's as a feared corporate raider, targeting large companies such as Trans World Airlines and US Steel. Since then, Mr. Icahn has continued his search for undervalued assets. A couple of his recent interests include Navistar (NYSE: NAV) and Netflix (NASDAQ: NFLX).

Navistar is a company that manufactures commercial trucks and truck engines. Icahn first showed a major interest in the company when he purchased a 7.1 million share equivalent, or 9.8% , position in the company around September 2011. He declared the company undervalued and was thought to be attracted by the benefits provided by an ongoing truck replacement cycle. He also hinted that the company’s merger with or acquisition of a like company might realize hidden value.

In November 2011, Icahn looked to push his agenda forward by changing some Navistar corporate governance rules that would give him a better chance of getting major Board of Director influence. The company did not put up any meaningful resistance to the idea.

However, since that time, Navistar soon faced a significant deterioration in its operations. The stock price had fallen from around $40 in September 2011 to around $23 in September of 2012. The causes of the company's decline can be debated, but Icahn let the company know his view in a scathing Sept. 9, 2012 letter.

In October 2012, to ensure longer-term liquidity, Navistar undertook a roughly 11 million share secondary stock offering at $18.75 per share.

Regardless of Navistar's troubles, Icahn continues to keep pressure on management. After the secondary, he still controls close to 15% of the company and reached an agreement to get two representatives on the Board.

Netflix is a well-known company that offers movies and TV shows over the Internet. In October 2012, it was reported that Mr. Icahn had close to a 10% stake in the company. The stake looks like it was mostly option related with an average share equivalent cost in the mid-$50's.

Icahn felt the company was undervalued. He believes that the company has a major advantage with its large subscriber base of roughly 29 million streaming members and 8 million DVD subscription members. Icahn noted that the consistent cash flow these subscribers generate is a major plus. He has stated that Netflix has a valuable first-mover franchise in a growing market and it could be attractive to a number of motivated buyers.

His interest in Netflix looks somewhat similar to his December 2004 interest in video retailer Blockbuster. At that time, Icahn initiated an approximate 5% position in the video distribution retailer. He said he thought the company was undervalued and that there could be some very profitable synergies available with a possible acquisition by Blockbuster of competitor Hollywood Video, of which he held close to 9% of the shares outstanding.

Blockbuster did make an offer for Hollywood Video in early 2005 but later dropped it due to antitrust concerns. However, Hollywood was subsequently acquired by another competitor a short time later.

Still active in both Navistar and Netflix, Mr. Icahn's ultimate results have yet to be seen. But his activities can provide a few helpful hints on how a successful investor operates:

1. Expand the Scope of Value

While an assessment of value typically depends on a numerical basis of operating cash realization, there are other factors that can have a significant effect. Icahn has shown that he's attracted to possibilities provided by companies with growing markets and synergies available through business combinations. It also looks like he prizes companies with big market share and first-mover status.

2. Price Matters

To increase one's success in an investment, one thing is clear: price does matter. Icahn seems very cognizant of the benefits to a low purchase price. I believe one of his memorable quotes on buying stocks was "I don't pay retail."

Icahn first initiated with Navistar around $40 per share, down from an early 2011 high of almost $60. With Netflix, he took it in at around $55 a share, down from a recent high of over $120. With Blockbuster he first came in at around $9 per share, down from the high of $19, and at Hollywood Video he initiated at roughly $11 a share, down from the yearly $14 high.

3. Manage the Risk

Mr. Icahn, before he was known as a corporate raider, was very successful in options and risk arbitrage operations. It is very likely that Icahn hedges his risk in the situations he is involved with, often using option strategies.

While options play is not recommended for most investors, they might want to consider other ways to manage their investing risk. Tools such as margin of safety, diversification, position limits, and even non-leveraged inverse ETF products can be very useful in mitigating the always-present downside possibilities.

grahamsway has no positions in the stocks mentioned above. The Motley Fool owns shares of Netflix. Motley Fool newsletter services recommend Netflix. 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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