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Billionaire Carl Icahn’s Top Stock Picks

Carl Icahn is a legendary corporate raider. He started his career on Wall Street in 1961. Seven years later, Icahn formed Icahn & Co, a securities firm focusing on risk arbitrage and options trading. In 2007, he founded Icahn Capital LP, an investment arm of Icahn Enterprises LP (IEP). Icahn announced in March 2011 that he would be returning outside investors’ money, which was worth about $1.76 billion. Icahn said he does not want to take the responsibility when another downturn happens. But Icahn will continue investing his own money. As of September, 2011, Icahn was ranked the 25th richest American and the 61st richest person in the world, according to Forbes.

Hedge Fund Strategies

Though Icahn no longer manages money for other investors, investors can still imitate his stock picks. Recently Icahn released his latest holdings in a 13F filing. Let’s take a closer look at his most bullish bets and decide whether it makes sense for investors to follow his investments.

Motorola Mobility Holdings Inc (MMI): MMI is the largest position in Icahn’s latest 13F portfolio. As of December 31, 2011, Icahn had nearly $1.2 billion invested in this position. Icahn has already made great profits from his bets on MMI, as Google Inc (GOOG) announced on August 15 last year that it agreed to acquire MMI for about $12.5 billion, or $40 per share. On August 12, one trading day before GOOG made the announcement, MMI was only trading at $24.47 per share. After GOOG released the information, MMI’s price jumped to a closing price of $38.12 per share on August 15. Today, MMI is trading at $39.70, only 30 cents below the merger price. There were 41 hedge funds with MMI positions at the end of the third quarter. For instance, Tom Steyer’s Farallon Capital had nearly $460 million invested in MMI. John Paulson’s Paulson & Co also had more than $400 million invested in MMI at the end of last year.

Federal Mogul Corp (FDML): Another large position in Icahn’s portfolio is FDML. Icahn increased his position in FDML by about 1% over the fourth quarter. At the end of last year, Icahn reported owning more than $1 billion worth of FDML shares in its 13F portfolio. A few other hedge fund managers were also bullish about FDML, including Ken Griffin, D.E. Shaw, and Israel Englander. FDML has attractive valuation levels. It seems to be undervalued by the market compared with its peers. The stock has a forward P/E ratio of 8.57 and its EPS is expected to grow at an average of more than 50% per year over the next five years. So its P/E ratio for 2014 is only 3.7, versus 4.65 for its main competitor Dana Holding Corporation (DAN).

A few other positions in which Icahn invested more than $1 billion in are IEP and El Paso Corp (EP). Similar to MMI, EP is also a takeover candidate. Kinder Morgan Inc (KMI) announced on October 16, 2011 that it had agreed to buy EP for a total of $21 billion, or $29.01 per share, with cash and stock. On October 14 last year, EP was closed at $19.59 per share. One trading day later, on October 17, the stock closed at $24.45. On February 17, EP was closed at $27.16 per share. We think it is still not too late to buy EP as investors can still make about 7% by purchasing EP right now. Many hedge fund managers also like this merger arbitrage play, including James Dinan, Leon Cooperman, and Tom Steyer.

Overall we like Icahn’s stock picks. Icahn has already made a bundle from his bets on takeover candidates EP and MMI. His other large bets are WebMD (WBMD), Navistar (NAV), Forest Labs (FRX), Motorola Solutions (MSI), CVR Energy (CVI) and American Railcar Industries (ARII). He already put CVI in play by making a low ball takeover offer. He might take similar actions with other stocks in his 13F portfolio.

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