How Carl Icahn Plans to Deliver Some Alpha

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

Billionaire Carl Icahn was at CNBC's Delivering Alpha conference last week to tout his top ideas. Of course he had a few choice words about his latest activist campaign involving Dell (NASDAQ: DELL). But he also reiterated his buy theses on his other favorite stocks, including Netflix (NASDAQ: NFLX) and Herbalife (NYSE: HLF).

Icahn had this to say about the Dell saga:  "I've been through a lot of these fights, but I've never seen anything like this." He doesn't care if founder Michael Dell ups his bid or not, he just wants to own the company. Icahn notes that he's made the most money from companies he's controlled.

Icahn also called out famed short-seller Jim Chanos. Chanos is short Hewlett-Packard and believes Dell will be pulled down too due to a weakening PC market. Icahn says to check out some of the stocks that Chanos has shorted, as they have gone up. 

One of Dell's major problems is its over-dependence on the PC market. Although the company is making some serious efforts to restructure its business, nearly 70% of its business is linked to the PC market.

But the company is looking to decrease this dependence; included in this is the company's focus on servers and consulting. These two segments only made up 16% and 15%, respectively, of fiscal 2013 revenue. 

One bright spot is international growth. Dell generated approximately 40% of its 1Q revenue from overseas. Its key focus areas are Brazil, Russia, India and China. There is still, however, much uncertainty for the company. Michael Dell recently increased his offer to $13.75 per share to take the company private; yet, the stock is trading for less than $13. 

Icahn is hoping to buy up the majority of the company and offer investors warrants so they can participate in future upside. I tend to agree with Icahn and am a fan of his proposed deal, but beware -- there are risks if shareholders reject the Michael Dell deal and Icahn doesn't have the funding to step in and support the company. 

Streaming investment 

Icahn credits his son, who manages one of the Icahn funds, for the Netflix investment. Since making the initial investment, Icahn hasn't sold any of the shares of the streaming company. Revenue is expected to be up 18% in 2013 and another 20% n 2014. 

However, the stock fell as much as 8% earlier this week on 2Q results. The company earned revenue of approximately $1.1 billion, inline with expectations, and EPS of $0.49 compared to expectations of $0.40. The bad news that investors appear to be focusing on includes lower-than-expected subscriber growth. The company added 630,000 subscribers during 2Q, which was below the 700,000 analysts had expected. 

From a valuation standpoint, Netflix is still rich by various measures. The company trades at nearly 700 times earnings and almost 4 times sales. On an EV/EBITDA basis, the company trades above 100 times. 

Battling billionaires 

The heat surrounding the Herbalife trade appears to be cooling. Billionaire Bill Ackman is on the short side of the stock, while Icahn is on the long side. The company has tried defending itself against concerns that it's a "pyramid scheme," and so far has managed to convince the majority of investors -- the stock is up nearly 80% year-to-date.  

Sales are expected to be up 13% in 2013, with more than 70% of sales from outside of the U.S.

Back when Ackman first touted his short thesis on Herbalife, Icahn called the company the "mother of all short squeezes." After the stock's move upward and revealing a position that includes owning 16.5% of Herbalife, Icahn is now proclaiming that the daughter of all short squeezes is now beginning in Herbalife. 

The stock is trading for less than 14 times earnings and has a 0.8 PEG ratio. Icahn notes that he's still in the stock, and actually bought more. He goes as far as to make the point that he has spoke to a multi-level marketing legal expert who believes that Ackman's several-hundred-page report on Herbalife is baseless. 

Bottom line

Icahn believes that Dell is a "no brainer" investment. I like the stock given Icahn's track record but the risk of the stock falling remains, assuming shareholders reject Michael Dell's offer and Icahn doesn't immediately step up with a valid offer.

Netflix has defied gravity with its 170% year-to-date stock price growth. But I find it difficult for the company to grow into the lofty valuation it's trading at. Other "high" growth tech company Amazon only trades at 2.2 times sales and an EV/EBTIDA multiple of 50 times. 

Meanwhile, the billionaire has also fared well with his bet against fellow billionaire Bill Ackman in Herbalife. While I wouldn't suggest shorting the stock, I don't see the stock as a viable long-term investment opportunity. 

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Marshall Hargrave owns shares of Dell. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix and has the following options: long January 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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