By tracking quarterly 13F filings from hedge funds and other notable investors, we have been able to use the included information to develop investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year). Many investors also like to use 13Fs to see what well-known managers such as billionaire activist Carl Icahn have been up to over the previous quarter. Top picks from these big names can serve as useful sources of investment ideas for further research, and activists such as Icahn also often publicize their own ideas for increasing shareholder value. Icahn usually doesn’t make many moves over the course of a quarter, but when he does they are big. Here are two themes that we noticed when comparing his holdings as of the end of March to those reported in previous filings:
Herbalife Ltd. (NYSE:HLF). If anyone’s been living on another planet for the last six months, let’s sum up: billionaire Bill Ackman of Pershing Square (see Ackman’s stock picks) gave a presentation accusing Herbalife Ltd. (NYSE:HLF) of being a pyramid scheme, driving down the stock price. As it was recovering, Icahn criticized Ackman in the media, eventually dialing in to a CNBC interview with the hedge fund manager and engaging in a nasty fight. Since then Icahn has become a major shareholder in Herbalife (though he had apparently started buying before his confrontation with Ackman) and owned over 16 million shares at the end of March. He has suggested that he may try to take the multilevel marketer of health and fitness products private at a premium. Now Herbalife Ltd. (NYSE:HLF) is almost exactly at where it was before Ackman’s short call.
Energy. Icahn has also been a bit unfriendly with his moves at Transocean LTD (NYSE:RIG), a $20 billion market cap offshore driller where Icahn has taken a 5% stake (with over 20 million shares in his portfolio at the end of Q1). He has been pushing the company to pay out a higher dividend to shareholders, and also wants to place some of his own nominees on the company’s Board of Directors as a reaction to what he sees as poor decisions that management has made over the years. Transocean LTD (NYSE:RIG) trades at 9 times consensus earnings for 2014, as analysts expect the company to significantly increase earnings per share between now and then (the same is true for many other offshore drillers). Billionaire Leon Cooperman’s Omega Advisors had owned 3.1 million shares at the end of December (find Cooperman’s favorite stocks).
With Icahn’s interest in Transocean LTD (NYSE:RIG), he now counts two energy stocks among his largest holdings given his roughly 60 million shares of shale gas producer Chesapeake Energy Corporation (NYSE:CHK). Chesapeake- which ran into trouble early last year after the company became financially stressed as a result of its overexpansion, prompting Icahn’s investment- is another favorite among sell-side analysts, with earnings forecasts over the next several years implying a forward earnings multiple of 10 and a five-year PEG ratio well below 1. Revenue grew by over 40% in its most recent quarter compared to the same period in the previous year.
Obviously Herbalife Ltd. (NYSE:HLF) is still something of a battleground stock, and we’d have to be quite sure it’s safe from regulatory action before investing, but certainly at current prices we’d strongly advise against being short. We do think that Chesapeake looks interesting, and would be interested in learning more about the company. As for Transocean LTD (NYSE:RIG), we’re skeptical that Icahn will be able to affect much change (due to its large size if nothing else) but the stock does look cheap assuming that the business can at least come close to analyst targets next year. Perhaps it could be a value prospect as well, particularly if next quarter’s results place it on track.
Disclosure: I own no shares of any stocks mentioned in this article.
