I reviewed Warren Buffett’s investing approach in Part I of this trilogy last Friday. The original post is found here. Now, on to Part II and Carl Icahn’s approach.
He’s not quite at the same level as Warren Buffett. Still, he could easily dip into his pockets to pay for a round at the local pub. Carl Icahn’s net worth – at $17 billion – slots him at 27 on the Forbes 400.
Like Buffett, Icahn is a billionaire, to belabor the obvious. And like Buffett, Icahn accumulated the bulk of his wealth through investment management and investing.
Unlike Buffett, Icahn has stuck to his value-investing roots. While Buffett has strayed off the value ranch to seek fortunes in other investing strategies, Icahn remains true to form. Indeed, his approach to value investing invokes Buffett’s approach 40 years ago.
The proof is in the portfolio. Icahn’s is larded with value-contrarian investments: CVR Energy (NYSE: CVI), Xerox Corp. (NYSE: XRX), Newell Brands (NYSE: NWL), and Cheniere Energy (NYSE: LNG). These are the investments of the minority investor who yins when the majority yangs.
What’s more, Icahn narrows the focus on value.
Icahn’s portfolio is composed of only 18 stocks. Of the 18, the top five account for 72% of portfolio value. The top investment – Icahn Enterprises LP (NYSE: IEP), of which Icahn is the eponymous founder – accounts for 36% of portfolio value.
Much of Icahn’s success is the stuff of Buffett in his early years. It’s also the stuff of both their mentors, Benjamin Graham, the recognized founder of modern value investing.
But Icahn has added a personal twist to the process.
You and I might concentrate our portfolio in a few value-priced investments, but we’ll passively twiddle our thumbs as we wait for an outcome. We’ll wait for investor sentiment to change; we’ll wait for the market to come to us.
Icahn, in contrast, will frequently agitate to accelerate the process.
Icahn summed up his investment philosophy in Barron’s a few years ago: “This is where the real hidden value is – when you are lucky enough to get control of a company and clean it up and grow it, that is when you make the big profits.”
“Agitate” covers an array of inducements.
One inducement is to buy sufficient shares to cajole management to see things your way. Another inducement is to acquire a controlling interest, or outright ownership, and then stamp your will on management.
Icahn has used both inducements to remunerative effect: RJR Nabisco, Dell, Texaco, Western Union, and Time Warner where big scores. Herbalife (NYSE: HLF), Xerox, and Newell Brands are recent subjects to Icahn’s brand of motivation.
Icahn and Buffett generally operate in separate orbits these days. The orbits have crossed on occasion, though. Both Icahn and Buffett, through Berkshire Hathaway (NYSE: BRK.b), have invested heavily in Apple (NASDAQ: AAPL).
Icahn began accumulating Apple shares in the second half of 2013. Steve Jobs wasn’t long gone. Apple’s share price was depressed on disappointing iPhone sales. Chinese consumers, once infatuated with the iPhone as a status symbol, were turning to more affordable smartphone alternatives. Investors were concerned a negative sales trend was emerging.
Despite the negative sentiment, Icahn stepped to the fore to buy 53 million Apple shares. Icahn claimed Apple was extremely undervalued. He initiated discussions with Apple CEO Tim Cook on ways to generate value. Apple began paying a dividend the year before. Discussions to create value centered on dividends and share buybacks.
Fast forward to early 2016. Icahn sells his Apple stake. He books a $2 billion profit.
As Icahn sells, Buffett buys. Buffett accumulates an Apple stake for Berkshire. And accumulate he does. Berkshire has accumulated 165.3 million shares since the first purchase two years ago. The market value is $28 billion. Apple is Berkshire’s largest stock holding.
One stock, two approaches to investing in that one stock. Icahn bought Apple when it was a disfavored, value investment. Buffett bought Apple when it was a lead large-cap growth stock.
So, whose logic and strategy wins?
Stay tuned. I wrap up the Buffett vs. Icahn trilogy on Friday. I’ll show who has won in the past. I’ll opine on who has the upper-hand in the future.