Billionaire Carl Icahn and Mark Rachesky Bet Big on This Stock

Mark Rachesky’s MHR Fund Management on Tuesday disclosed an increase in their position in Navistar (NAV) to just over 10 million shares, which brings their ownership of the company close to 15% (see other stocks owned by MHR Fund Management, including Lions Gate Entertainment (LGF)).  As a result they have passed Carl Icahn to become NAV’s largest hedge fund shareholder.  MHR filed their original 13D on June 15^th, which disclosed that they had acquired 13.6% of the outstanding shares.  Possibly because of further declines in the company’s stock since that time, MHR decided that the potential for NAV to enter into an M&A deal or otherwise survive its current troubles- the company has lost about 39% of its value since the beginning of the year as it experiences difficulties developing a new model of truck engine- was an interesting profit opportunity. Mark Rachesky formerly worked for Carl billionaire Icahn.

Carl Icahn (see his other top picks) has held a position in NAV for several months as he has publicly encouraged the company to merge with another of his holdings, Oshkosh (OSK).  He initiated his position in Navistar between June and September 2011, tripled his ownership in the fourth quarter of 2011 to finish the year with nearly 7.3 million shares, and increased his position to about 8.1 million shares in June.

Navistar has become a target for other activist and value investors.  Owl Creek Asset Management (see Jeffrey Altman’s stock picks) still held nearly 3 million shares of NAV at the end of March after selling about half of their shares in the first quarter.  Mario Gabelli’s GAMCO Asset Management, which held 2.6 million shares at the end of March, has since increased their holdings to 3.2 million shares.  Gabelli is a value investor likely attracted to the stock’s low price-to-earnings ratio.  The decline in NAV’s value so far in 2012 has left these funds in the red on the trade- however, the fact that Icahn and Rachesky are adding to their position as the stock falls indicates that they have some level of confidence the company’s value is being underappreciated in the market.

Navistar’s peers include Oshkosh (OSK) as mentioned earlier as a possible candidate for a merger; PACCAR (PCAR), a much larger company with a market cap of nearly $13 billion compared to NAV’s $1.6 billion and OSK’s $1.9 billion; and two smaller companies with less than a $300 million market cap, Commercial Vehicle Group (CVGI) and Miller Industries (MLR).  Likely because of the risk that Navistar’s engine project will fail to receive approval from the government or encounter other obstacles on the way to market, Navistar trades at a much lower P/E relative to its peers.  PCAR and OSK are both slightly down year to date compared to NAV’s 39% decline.