3 Stock Picks of Carl Icahn

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

Even though it’s never a good idea to follow marquee investment managers blindly, it’s a wise idea to engage in fact-checking with them periodically. The highly regarded Carl Icahn is betting big on these companies, and hoping to earn stellar returns from these names.

Carl Icahn has a long history of taking big positions in undervalued firms, and trying to push for a sale or enforce corporate changes to unlock the true value of the company. Let’s take a look at three of his leading technology picks and his possible investment thesis behind them. 

Fighting for Dell

Carl Icahn is trying to outbid the company's founder Michael Dell to take Dell (NASDAQ: DELL) private. Michael Dell has already submitted a deal to buy Dell for $13.65 a share with an investment partner, Silver Lake. The company postponed a shareholders' vote to buy time for the founder to gather more votes before the final decision takes place. Icahn and Southeastern Asset Management believe that the company's shares are being sold at a discount to their intrinsic value and wound up making a $14 a share bid for the company.

To finance the massive transaction, Icahn even arranged financing from Jefferies to the tune of $5.2 billion. Icahn specializes in acquiring undervalued assets or troubled firms, and makes changes in the board or management of the company, and finally flips that company for a profit.

The embattled PC maker is in the middle of a heavy secular decline as more and more consumers are opting to use tablets and smartphones for casual connectivity to the Internet, instead of PCs. Some investors have stated that Dell is worth less than $9 a share, but that shouldn't concern a long position.

An arbitrage trade, albeit a small one, exists by going long Dell shares at current prices of around $13.10, which is below the offers on the table from Michael Dell and Carl Icahn, whose offers stand at $13.65 and $14 a share, respectively.

A pick from healthcare

Icahn has a 13% stake in the healthcare information service platform, WebMD Health (NASDAQ: WBMD). The company has been witnessing solid increases in user traffic across the WebMD Health Network, which hit 125.5 million monthly unique users. The company's total page views were up 6% Y/Y to 2.64 billion page views.

The company increased its guidance for 2013 to $485 million-$505 million in revenue, which represents 3%-7% increase from 2012. In addition, it expects to earn a small profit for 2013 to the tune of $3 million-$11 million, which is great news, as the company had guided for a net loss for 2013 previously. 

WebMD's management stated that the company upped its revenue guidance on better-than-expected spending from pharmaceutical firms on its public portal, and seeing more commitments from Blue Cross for its private portal services. Even though the stock is up 117% YTD, the company might have more upside. 

A home run

Carl Icahn took a big stake in Netflix (NASDAQ: NFLX) when the stock of the Internet video streaming company was below $60 in late 2012. And the company has been one of the best performing stocks in the entire S&P 500, generating returns of more than 185% in 2013 alone. Carl Icahn hit the jackpot, earning well above $1 billion from a single investment! 

Icahn took his big stake in Netflix with the hope of selling the company to a bigger technology company like Microsoft or Apple, the plan didn't materialize as Netflix quickly adopted defense mechanisms to shun a possible takeover. The company's foray into the building of original shows has been a very successful strategy thus far. Netflix's domestic subscriber additions are coming well ahead of projections of the sell-side analysts.

In addition, Netflix will be a big beneficiary of higher penetration levels of Internet-connected devices, which will aid its growth across the globe. The company's ubiquitous access to shows on demand for a low monthly fee of $8 a month appeals to a much larger user base compared to the likes of HBO. Netflix has a lot of growth potential in the overseas markets as well, but it will take a lot of time for that segment to achieve profitability.

The takeaway

Icahn's three picks listed above have room to run from current levels. Dell is a takeover play, WebMD will be a beneficiary of increased pharmaceutical and biotech advertising and spend online, and Netflix has multiple secular drivers benefiting its business model.

It’s never a good idea to follow marquee investors blindly. And one should do their own research heavily before making investment decisions. Tracking highly successful and tough investors like Carl Icahn is always a good idea, at least for matching notes. 

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Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of 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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