When activists clash!
While Carl Icahn is best known for his widely publicized battles with the boards of Netflix, Inc. (NASDAQ:NFLX), The Clorox Company (NYSE:CLX) and Biogen Idec Inc. (NASDAQ:BIIB), he has also clashed with other activist investors on multiple occasions.
Icahn’s most recent foe is William Ackman, the activist investor who is waging a personal war against Herbalife Ltd. (NYSE:HLF).
William Ackman has claimed that Herbalife, a multi-level marketer of nutritional and skincare products, is a ‘pyramid scheme’ running on inflated numbers. Ackman has been so certain of his accusations that he once held a three-hour presentation denouncing the company, and launched a web page dedicated to his arguments. Icahn disagrees with Ackman and believes that the company has long-term growth potential.
Both men are certainly putting their money where their mouths are. Ackman’s hedge fund, Pershing Square Capital, disclosed that it was shorting approximately $1 billion in Herbalife shares. Icahn responded by buying a 13% stake in the distressed company, which has a total market value of $4 billion.
Regardless of Herbalife’s financial honesty or the sustainability of its multi-level marketing system, the company’s numbers are financially strong, as seen it the chart below.
What's more, Herbalife recently beat earnings estimates handily for its fourth quarter, posting record growth. It also upped its guidance for fiscal 2013.
Yet I firmly believe Carl Icahn’s investment has less to do with Herbalife’s fundamentals and more about forcing shorts mimicking Ackman, a widely followed investor, to panic and cover their positions.
‘Short squeezes’ - where traders shorting the stock rush to repurchase, or cover, their positions, often cause huge rallies. Indeed, news of Icahn’s initial investment initially caused the stock to rally more than 20%.
The Foolish Bottom Line
In the end, investing in holdings conglomerates such as Icahn Enterprises and Berkshire Hathaway have less to do with macro factors and more about your faith in the CEO. Just as some mutual and hedge funds are actively managed by star portfolio managers, Carl Icahn and Warren Buffett have their own approaches to maximizing shareholder value. However, for dividend investors interested in following one of these star investors, Icahn Enterprises, now offering nearly 5% in dividends, is clearly a more attractive choice than Berkshire Hathaway, which does not pay one at all.
The article Carl Icahn Wants to Show You the Money originally appeared on Fool.com and is written by Leo Sun.
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