Very few investors on the Street can boast of commanding both respect and fear the same way as billionaire activist investor Carl Icahn. Having made his name in the 80s takeover mania, in the last two decades through activist investing Mr. Icahn has been instrumental in unlocking vast amount of shareholder value in the most companies that he has invested in. In a previous post we have discussed Mr. Icahn’s largest equity holdings at the end of the third quarter as revealed by Icahn Capital LP’s last submitted 13F filing with the SEC and in this article we are going to take a closer look at the top five small-cap stocks that he was betting on going into the fourth quarter.
Following activist funds like Icahn Capital is important because it is a very specific and focused strategy in which the investor doesn’t have to wait for catalysts to realize gains in the holding. A fund like Icahn Capital can simply create its own catalysts by pushing for them through negotiations with the company’s management and directors. In recent years, the average returns of activist hedge funds have been much higher than the returns of an average hedge fund. Furthermore, we believe do-it-yourself investors have an advantage over activist hedge fund investors because they don’t have to pay 2% of their assets and 20% of their gains every year to compensate hedge fund managers. We have found through extensive research that the top small-cap picks of hedge funds are also capable of generating high returns and built a system around this premise. In the 39 months since our small-cap strategy was launched it has returned over 102% and beaten the S&P 500 ETF (SPY) by more than 53 percentage points (read more details).
#5 Navistar International Corp (NYSE:NAV)
– Shares Owned by Icahn Capital LP (as of September 30): 16.27 Million
– Value of Holding (as of September 30): $207 Million
Large vehicle manufacturer Navistar International Corp (NYSE:NAV) has lost 72% of its market capitalization this year with almost 44% of those losses coming in the third quarter alone. However, hedge funds are finding the company lucrative at these levels. Icahn Capital LP kept its stake in Navistar International Corp (NYSE:NAV) unchanged during the third quarter, while the ownership of the company among funds covered by us also saw a jump of 56% during the same period. On December 17, shares of Navistar International Corp advanced by 12% after it reported better-than-expected fourth-quarter results. EPS for the quarter came in at $0.54 on revenue of $2.50 billion versus analysts’ expectation of a per share loss of $0.62 on revenue of $2.47 billion. After Icahn Capital LP, Mark Rachesky‘s MHR Fund Management was the second-largest shareholder of the company at the end of September among funds covered by us with ownership of over 16.2 million shares.
#4 Mentor Graphics Corp (NASDAQ:MENT)
– Shares Owned by Icahn Capital LP (as of September 30): 16.12 Million
– Value of Holding (as of September 30): $397 Million
Owing largely to the over 30% drop its shares saw on November 20, a day after the company reported its third quarter earnings, Mentor Graphics Corp (NASDAQ:MENT)’s stock currently trades down nearly 15% year-to-date. Although the EPS of $0.28 on revenue of $290.52 million that the company reported was only slightly below analysts’ expectations of EPS of $0.28 on revenue of $290.52 million, the disappointing guidance it gave for fourth quarter made investors dump the stock in droves. Analysts were expecting the company to project EPS of $0.97 on revenue of $439 million, but it guided EPS of $0.47 on revenue of $336 million. Another shareholder of the company is Ken Fisher‘s Fisher Asset Management, which held 1.75 million shares of the company at the end of September.