If you compare the greatest investors of all time, from Carl Icahn to Warren Buffett to John Malone, you may be surprised to know that Carl Icahn comes out on top. He’s a master dealmaker, but he’s also known as a vulture capitalist. He swoops in when there’s blood in the streets and forces companies to reform for the better.
Investors have the opportunity to invest with him directly via his Icahn Enterprises LP (IEP). However, as the latest quarterly results demonstrate, trying to value IEP stock is effectively impossible.
That’s because IEP stock holdings change from one quarter to the next, and the valuations of each holding change as well. So there are no price-earnings ratios with IEP stock, or even things like comparing Icahn Enterprises to John Malone’s companies based on something like EV-to-Cash Flow ratios.
That means you have two options with IEP stock. You can just buy and hold it forever and assume Icahn’s track record will win out over the long run. Over the past twenty years, for example, IEP is a ten-bagger despite being about 50% off its all-time high.
The other option is to just trade IEP stock, in which case now may be a good time to buy in.
The full year and quarterly earnings demonstrate several things, not just about Carl Icahn and IEP stock, but about many elements of the stock market, which is why it’s important to see what caused losses and why.
IEP Stock: A Closer Look at Icahn Enterprises
Icahn Enterprises reported that its holdings lost $1.2 billion in 2015, almost all of which were in the fourth quarter. The danger of being a vulture investor is that investing in a distressed company does not mean that the company stock won’t stop going down or that business can be improved.
Much of this year’s problems came not from Carl Icahn and his activist approach, but because the companies he was being an activist in are tied to cratering prices in energy and commodities.
Carl Icahn has had a huge position in Chesapeake Energy (CHK) for years, but it fell 77% in 2015. He had the same problem with Cheniere Energy (LNG). This past summer, Carl Icahn took a position in Freeport-McMoRan (FCX), which is a copper and oil producer, so it’s had a double whammy of falling prices. He’s also made a terrible bet on Hertz Global Holdings (HTZ).
So given these terrible results and the discount from its all-time high, isn’t it possible that IEP stock trades even lower? Yes. Interestingly, however, the market sent the stock up about 5% Monday after the results were reported.
There is also a huge advantage to being a crafty distressed asset investor: If Icahn not only bets right, but is able to leverage his power to make material improvements to a company, that company can literally provide a three, five or even ten-fold return on his investment.
So even though these energy and commodity plays are getting killed, and they may still get killed in the coming year, copper appears to be forming a bottom, and oil will return to higher prices at some point in the future.
I think the move here is to nibble at IEP stock, or open a half position and average down. It’s good for a long-term trade.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.