Impressions From Billionaire Carl Icahn’s Discussion At The DealBook Conference

Billionaire Carl Icahn is one of the most feared activist investors on Wall Street and Insider Monkey had the pleasure to hear him speak at the DealBook conference at the Whitney Museum of American Art yesterday. The reputable investor discussed activist investing in general, American International Group Inc. (NYSE:AIG), the energy sector, and Apple Inc. (NASDAQ:AAPL), among other things. This article will discuss some of the most memorable moments and points made by Carl Icahn at the conference.

Most Popular Stocks Among Hedge Funds

Hedge funds and other big money managers like Icahn tend to have the largest amounts of their capital invested in large and mega-cap stocks like Apple Inc. (NASDAQ:AAPL) because these companies allow for much greater capital allocation. That’s why if we take a look at the most popular stocks among funds, we won’t find any mid- or small-cap stocks there. However, our backtests of hedge funds’ equity portfolios between 1999 and 2012 revealed that the 50 most popular stocks among hedge funds underperformed the market by seven basis points per month, showing that their most popular picks and the ones that received the bulk of their capital were not actually their best picks. On the other hand, their top small-cap picks performed considerably better, outperforming the market by 95 basis points per month. This was confirmed through backtesting and in forward tests of our small-cap strategy since August 2012. The strategy, which involves imitating the 15 most popular small-cap picks among hedge funds has provided gains of 102%, beating the broader market by over 53 percentage points through the end of October (see the details).

Carl Icahn
Carl Icahn
Icahn Capital LP

Carl Icahn defended activist investing once again, and his widely-known and feared approach of shaking up companies in particular. He praised the activism that does not focus on short-term results, and listed several companies that his Icahn Enterprises has owned for as many as 31 years. Specifically, he claimed that: “You don’t have corporate democracy. You have people that run companies that aren’t bad people but shouldn’t be running the companies”.

The activist investor stressed his point of view by telling a rather humorous and wordy story about his investment in ACF Industries LLC roughly 31 years ago. Icahn explained that he wasted quite some time at the company’s New York office in an attempt to understand how its business was running and what its employees were doing. “I spend the whole day there, go home, take a look at my yellow pad and I can’t tell what the hell they do”, he said. After hiring consultants to help him figure out what those employees were doing and failing to find an answer, he fired 12 floors of employees and sold the lease for $10 million. All-in-all, long-term oriented activists are indispensable in creating value at poorly-managed companies.

Icahn also reiterated his thoughts on the low-rate monetary policy pursued by the Federal Reserve, which has resulted in inflated corporate earnings. “Earnings are way overstated in this country”, Icahn mentioned in his interview with Andrew Ross Sorkin at the DealBook Conference. He mentioned Valeant Pharmaceuticals Intl Inc. (NYSE:VRX) as a great example of a company with overstated earnings, but there are numerous companies with the same issue, according to Icahn. The activist investor agreed with hedge fund investor Stanley Druckenmiller, who was also present at the conference, on the fact that the policies pursued by the Federal Reserve will most likely cause serious problems in the months or years ahead. “There are going to be real problems. We’re walking into a minefield of what’s going on with the Fed”, Icahn asserted. Let us remind you that Carl Icahn recently release a video titled “Danger Ahead”, where he revealed some of his concerns on the state of the stock market and the economy in general (read more details).

The next page of the article will reveal Icahn’s thoughts on the energy sector, as well as his stance on AIG and Apple.

Icahn also mentioned his most up-to-date corporate campaign on American International Group Inc. (NYSE:AIG). Just recently, the activist investor sent a letter to AIG’s CEO Peter Hancock, saying that the company would greatly benefit from splitting its insurance businesses into three independent public companies. The CEO recently said that a potential split would result in significant expenses, but would also divert the company from implementing its cost-cutting efforts. Icahn said that he would meet the CEO this week in order to discuss their thoughts on the proposed split. John Paulson of Paulson & Co., another major shareholder of American International Group Inc. (NYSE:AIG), is also an advocate of a split and reckons that AIG’s share price could reach a price level of greater than $100 per share should the company make this move.

Icahn also briefly discussed his energy bets, including Chesapeake Energy Corporation (NYSE:CHK), Transocean LTD (NYSE:RIG) and CVR Energy Inc. (NYSE:CVI), suggesting that he is bullish on the energy sector overall. The investor is currently losing money in Chesapeake, and Transocean “will lose a lot of money”, but his portfolio was not hit overly hard by the sluggish energy sector because “CVR worked out” for him and his team. He also added that “I don’t really mind them going down, because I know in my mind that I am going to buy more of them. I am waiting to buy more of these oil companies”, Icahn said.

On a final note, Carl Icahn considers Apple Inc. (NASDAQ:AAPL) to be “the greatest company in the world”, mentioning its cheap valuation. Of course, the shares of the tech giant seem to be trading quite cheaply at the moment if considering its trailing P/E ratio of 13.32, compared to the median of 22.65 for the companies included in the S&P 500 index. Even so, Apple’s current valuation seems to reflect the concerns about its high reliance on iPhone sales, which may not go away until Apple adds another killer revenue stream to complement it’s iPhone revenue stream (or more aptly, raging river).

Disclosure: None