Viewed as one of the most prolific investors on Wall Street, Carl Icahn has generated a 31 percent annualized return for his investors (1968-2014). Icahn is infamous for his cage-rattling, activist investment strategy. According to Mark Stevens, author of “King Icahn,” “he (Icahn) gets into a company that’s not performing well, buys shares, gets on the board and frightens management.” Essentially, “he threatens the guys that are running the company that they are going to lose their jobs or control of the company.” Basically, management face these consequences unless they manage to improve stock performance and increase dividends.
Icahn typically invests in “turn-around” companies (those facing bankruptcy, etc), pushes for change and then sells them when operations improve and the stock price rises. In addition, Icahn typically invests in companies that are contrarian bets: “the consensus thinking is generally wrong. If you go with a trend, the momentum always falls apart on you. So I buy companies that are not glamorous and usually out of favor. It is even better if the whole industry is out of favor.” With this in mind, let’s take a look at two of Icahn’s top portfolio holdings:
Top Holding (1): CVR Energy Inc. (NYSE: CVI)
Icahn took a majority position in CVR Energy back in 2012. The company’s principal business is in petroleum refining and nitrogen fertilizer manufacturing, in which operations are performed through its holdings in CVR Refining LP (NYSE: CVRR) and CVR Partners LP (NYSE: UAN) respectively. As a holding company, CVR Energy derives the majority of its profits from its aforementioned holdings.
Icahn likes CVR Energy because it owns deeply undervalued midcontinent U.S. refineries. He believes that the company has a cost advantage over competition as its refineries are located near emerging, low-cost shale rock formations. Therefore CVR Energy has the potential to lock-in higher than industry average profits, when it converts fuel to gasoline.
At the time of writing, the company is trading at a P/E ratio of 75.42 and a forward P/E ratio of 25.07. The year-to-date (YTD) performance of CVR Energy is up 40.21%.
Top Holding (2): American International Group Inc. (NYSE: AIG)
As Icahn’s second largest holding, this insurance giant has been viewed as “too big to succeed.” According to Icahn, “the company continues to severely underperform its peers and is now facing an increasingly onerous regulatory burden which will only further erode its competitive position.”
For years, Icahn championed that AIG would better off if it split up to avoid the regulatory label of “too-big-to-fail” – which comes with added regulatory costs. Over the years, the company has conceded to some of Icahn’s requests and has rewarded him with a board seat – Icahn is AIG’s third largest investor. As of recently, Icahn has backed off his campaign to split up AIG, since the company has sold off its assets and recently hired a new CEO that is expected to boost AIG’s return on equity.
At the time of writing, the year-to-date performance of AIG is down -9.06%.