Billionaire Activist Investor Carl Icahn’s Top Small-Cap Picks For Q4

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.

#3 Chesapeake Energy Corporation (NYSE:CHK)

 – Shares Owned by Icahn Capital LP (as of September 30): 73.05 Million

 – Value of Holding (as of September 30): $535.45 Million

Though most oil and gas companies have slumped heavily this year due to the fall in crude oil and natural gas prices, not many stocks can compare to the almost 80% fall Chesapeake Energy Corporation (NYSE:CHK)’s shares have registered year-to-date. Icahn Capital LP held on to its conviction in the stock by not selling any shares during the third quarter, but with no solution in sight for the debt woes of Chesapeake Energy Corporation (NYSE:CHK) the fund would be finding it very difficult to do so now. Recently, Chesapeake Energy Corporation revealed that it has hired restructuring advisor Evercore Partners to help it with the $11.8 billion debt the company has on its balance sheet. On December 23, analysts at SunTrust reiterated their ‘Buy’ rating on the stock, but lowered their price target on it to $7 from $10. Robert Pitts‘ Steadfast Capital Management initiated a stake in Chesapeake Energy Corporation during the third quarter by acquiring 9.23 million shares of the company.

#2 Federal-Mogul Holdings Corp (NASDAQ:FDML)

 – Shares Owned by Icahn Capital LP (as of September 30): 138.59 Million

 – Value of Holding (as of September 30): $946.57 Million

Moving on, Federal-Mogul Holdings Corp (NASDAQ:FDML) is another stock that has lost more than half of its market capitalization this year (down 55.6%). Amid a 40% drop in its stock during third quarter, Icahn Capital LP didn’t make any changes to its stake in the company. On October 28 Federal-Mogul Holdings Corp (NASDAQ:FDML) reported its third quarter earnings declaring EPS of $0.17 on revenue of $1.82 billion. Analysts had expected the company to report EPS of $0.22 on revenue of $2.02 billion. Following the earnings release, on October 29, analysts at FBR & Co. reiterated their ‘Market Perform’ rating on the stock, but lowered their price target to $9 from $14. Peter Rathjens, Bruce Clarke and John Campbell‘s Arrowstreet Capital almost doubled its stake in Federal-Mogul Holdings Corp to 259,500 shares during the third quarter.

#1 CVR Energy, Inc. (NYSE:CVI)

 – Shares Owned by Icahn Capital LP (as of September 30): 71.2 Million

 – Value of Holding (as of September 30): $3 Billion

Finally, even though CVR Energy, Inc. (NYSE:CVI) is the only stock among the top five in which Icahn Capital LP reduced its stake (by 6 million shares) it still remained the fund’s top small-cap pick at the end of September. Interestingly, it is also the only company on this list that is trading in the green for the year (up by 4.65%). The company currently pays a quarterly dividend of $0.50, which even translates into an attractive annual dividend yield of almost 5%. The company is scheduled to report its fourth quarter earnings in mid-February and analysts expect it to report a per share loss of $0.10 on revenue of $886.49 million. Joel Greenblatt’s Gotham Asset Management reduced its stake in CVR Energy, Inc. (NYSE:CVI) by 23% to 162,704 shares during the third quarter.

Disclosure: None