Whatever You Do, Don’t be Fooled by the ‘Icahn Effect’

ICAHN CAPITAL LPVery few hedge fund managers get to have an investing maxim named after them. But so many people follow in the slipstream of activist hedge fund manager Carl Icahn, trying to profit from his moves, that there’s even a phenomenon named after him — “The Icahn Effect.”

Though this effect can be seen every few months — most recently with quick spikes for Netflix, Inc. (NASDAQ:NFLX) and Greenbrier Companies Inc (NYSE:GBX) — 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 his investment moves have gleaned a cult following.

Let’s take Mentor Graphics Corp (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 bid will reflect inherent synergies and should be superior to our $17 offer,” he said at the time.

Whatever You Do, Don't be Fooled by the 'Icahn Effect'

Any investor who sought to profit from Icahn’s saber-rattling was badly burned, as shares eventually fell below $10, and still remain below Icahn’s offer price. That’s not to suggest that Icahn himself hasn’t profited. He owned more than 10% of the company prior to going public with his acquisition plans, with an average cost 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 away.

That was the case with The Clorox Company (NYSE:CLX), 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 losses.

Whatever You Do, Don't be Fooled by the 'Icahn Effect'

Icahn has also failed miserably in his attempts to juice the stock of Navistar International Corp (NYSE:NAV) and WebMD Health Corp. (NASDAQ:WBMD). Each stock now trades well below the levels he thought represented deep value.

Carl Icahn’s Losing Streak

Whatever You Do, Don't be Fooled by the 'Icahn Effect'

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 that fair 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 2013 earnings 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’s CEO 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 lower.

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 shares higher.

Action to Take –> If you wake up one morning to find that one of your investments 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.

This article was originally written by David Sterman, and posted on StreetAuthority.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!