What in the world is investor Carl Icahn up to now? This past week, the controversial Mr. Icahn, who recently bought into a 9.4% stake of Family Dollar Stores (FDO), demanded that the company immediately be put up for sale. He also threatened to ask shareholders to fire the entire 11-member board of directors should they refuse. Mr. Icahn’s stake is now the largest one in the company.

This was shocking enough, but let’s review some recent events related to Mr. Icahn and his dealings with FDO:

• On June 9, 2014, the media releases a story that Carl Icahn has purchased a 9%-plus stake in FDO. Insidermonkey.com states that Mr. Icahn sees long term potential in FDO and will talk with senior management and the board to discuss the company’s financials and strategies, so as to enhance shareholder value. The site also says that Icahn wants to add his own people to the board of directors.

• On speculation that Icahn will push for a merger with Dollar General (DG), FDO stock gaps up 12% in one day, reaching $70.30 intraday before closing at $68.62 per share. FDO then stalls out and retraces a portion of that gap before climbing back up to the $68 level.

• 11 days after the initial announcement, Icahn pressures FDO management to add his own people to the board and to consider selling the company. He states that he has already met with FDO Chairman and CEO, Howard Levine to discuss his concerns that FDO is underperforming and that changes are needed.

So much for his vision of long-term potential! But it’s true that he certainly did enhance the value of FDO stock, and Icahn has probably already profited rather nicely from the rise in FDO stock. The main question now is who (if anyone) will want to buy FDO, given its shaky earnings and recent problems, especially at this lofty and perhaps artificially induced stock price?

We must also ask, if a potential purchaser is not obligated to keep the same people on the board of directors, why would Icahn be pushing so hard to get his people to serve on the FDO board? Is he that sure that he can negotiate to keep his board seats with the new purchaser?

As I noted in a recent article, Family Dollar Store’s recent problems are numerous. The discounter, which owns and operates 8100 stores across 46 states, has now delivered two consecutive bad quarters of earnings. The last earnings report was 10 cents below analysts’ estimates, and the bad quarter was weakly blamed on poor weather and a shorter quarterly calendar. Michael Bloom, company President and COO, recently resigned.

In addition, FDO has cited the need to slash prices to become more competitive. Store closings and layoffs have been announced for the remainder of 2014. Plans to open new 525 stores in 2015 have now been reduced to a level that is somewhere between 350 and 400. None of this would normally bode well for FDO stock had Icahn not entered the scene.

The Family Dollar Store board has already rejected one takeover bid. In 2011, a bid by investor Nelson Peltz was turned down. FDO’s board of directors has now enacted a “poison pill” provision, a strategy used by companies to prevent outright hostile takeovers from occurring.

While a company might become attractive for a takeover when its stock is badly beaten down, the recent publicity around Carl Icahn’s heavy purchase of FDO has returned FDO stock to a level where, given its recent problems, is no longer very attractive. The current dividend yield has dropped to 1.79%

After the recent earnings miss when it was crushed from $71 to $58, there was some takeover value, but ironically Icahn, whose reputation for turning companies around is legendary, may have unwittingly thwarted a potential purchase by artificially lifting FDO’s stock price.

So, what’s an investor to do? Well…

Strategies for Investors

If you are long FDO stock, it’s probably best to hold on, as speculation of a sale continues to push the stock price higher. As you can see from the accompanying chart, on Monday morning, FDO stock was re-testing the recent highs around $70, and more of that can be expected in the days ahead. It is also likely that a purchase of FDO and its stock would be at a price several dollars above that level.

Chart courtesy of Stockcharts.com

But keep in mind that FDO stock is technically overbought at the moment, with an RSI reading of more than 79. That means that any bad news about a possible sale could quickly trigger a huge decline in the price. Therefore, a prudent hedge against a long position might be a small purchase of some inexpensive Puts. The July Puts with a $64.50 strike are bid/ask right now of $0.50/$0.85.

If you are long with either Dollar General or even Dollar Tree Stores (DLTR), it would be wise to keep a close eye on the scuttlebutt you may hear over the next few weeks. I don’t think it would help either company or their stocks to purchase FDO in its present condition. In fact, as a short-term play, I would short whoever buys FDO. Obviously companies believe that such a purchase will help them in the long term, and while that may be true, in the short term, such a purchase may negatively affect their bottom line.

One way or another, whatever happens in the next month or two will be quite interesting, and as the drama unfolds, investors would be wise to pay close attention to all of the exciting news releases by and about Family Dollar Stores.

Ethan Roberts does not own shares of any of the companies mentioned in this article