Very few hedge fund managers get to have an investing maxim
named after them. But so many people follow in the slipstream of
activisthedge fund manager Carl Icahn, trying toprofit from his
moves, that there's even a phenomenon named after him -- "The Icahn
Though this effect can be seen every few months -- most recently
with quick spikes for
Netflix (Nasdaq: NFLX)
Greenbrier Cos. (
-- it's a trend you should ignore or even bet against. Simply put,
Icahn is great at rattling cages, but has a pretty poor track
record when it comes to spotting truly undervalued companies.
Looking at trading data during the past few years, it's hard to
understand why hisinvestment moves have gleaned a cult
Mentor Graphics (Nasdaq: MENT)
as an example. In February 2011, he offered $17 a share to buy the
maker of electronic design software. But he was never keen to
follow through with such a move, and instead admitted it was just a
ploy. "We believe that there are potential strategic bidders for
Mentor Graphics whose bidwill reflect inherent synergies and should
be superior to our $17offer ," he said at the time.
Any investor who sought to profit from Icahn's saber-rattling
was badly burned, asshares eventually fell below $10, and still
remain below Icahn'soffer price . That's not to suggest that Icahn
himself hasn't profited. He owned more than 10% of the company
prior togoing public with hisacquisition plans, with an averagecost
basis below $10, and cashed out most of his stake after he got the
investing public to pay attention -- and bid shares up.
Poaching big game
Icahn tends to pick on smaller companies (withmarket values below
$2.5 billion) as they are more likely to succumb to his pressure
tactics. When he goes after bigger prey, he usually meets his
match, as more sophisticated company boards simply dismiss him
That was the case with
, the consumer goods maker that is valued at nearly $10 billion. In
July 2011, he offered to buy the company for almost $80 a share,
causing the stock to spike above $70. "While we stand ready and
able to buy Clorox, we encourage you to hold an open and friendly
'go-shop' sale process" he wrote to Clorox's board, "we are
confident the process will result in numerous superior bids for
this company." No such suitors emerged and for any investors still
hanging around in Icahn's wake, quick profits turned into quick
Icahn has also failed miserably in his attempts to juice the
Navistar (NYSE:NAV )
WebMd (Nasdaq: WBMD)
. Each stock now trades well below the levels he thought
represented deep value.
Carl Icahn's Losing Streak
Unfortunately, investors appear to have short memories, having
recently bid up shares of Netflix and Greenbrier. Each stock spiked
by double-digits on the day Icahn announced his intention to force
the company to unlock shareholder value. Yet if history is any
guide, then his moves will come to naught. Shares will eventually
drift back to levels seen before he arrived on the scene.
Take Netflix as an example. After a stunning fall, shares had
settled into the $60 to $70 range.
Back in April
, I said thatfair value for Netflix was "somewhere in the high
$60s" and the company's operating metrics have deteriorated further
since then. During the past 90 days, analysts have trimmed their
consensus 2013earnings forecast from 94 cents a share to 44 cents a
share on the heels of lowered guidance.
Though Icahn wants Netflix to put itself up for sale,
Netflix'sCEO Reed Hastings realistically notes that a potential
suitor is unlikely to emerge, so he recently authorized his board
to adopt a "poison pill " plan to get Icahn to back off. That's OK
with Icahn. He can use this time to lock in his gains, while other
investors still think a lucrative offer may be coming. By the time
most investors realize Netflix is not in play and shares drift back
down, Icahn's current 10% stake in the company will likely be quite
Risks to Consider:
As an upside risk, an upturn in deal-making could lead
investors to think Icahn's moves will pay off, and they may bid
Action to Take -->
If you wake up one morning to find that one of yourinvestments has
spiked higher on news that Icahn has arrived on the scene, then
that may be a wise time to book profits. And if you are thinking
about profiting from the "Icahn effect" after he has already goosed
a stock, then you should think again.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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