In a recently submitted 13G filing with the SEC, legendary activist investor Carl Icahn‘s Icahn Capital LP revealed that it had increased its activist stake in the liquefied natural gas company Cheniere Energy, Inc. (NYSEMKT:LNG) by 17.2% to 22.68 million shares. The position amasses 9.59% of the company’s outstanding common stock and is valued at more than $1.23 billion at the current price.
Mr. Icahn doesn’t need any introduction, being one of the most successful investors, who began his career as a stockbroker in 1961 and in 1978 started taking controlling stakes in individual companies. In the last almost 40 years, he has lead several companies and their management to change their course of action in order to increase shareholder value. As of June 30, Icahn Capital LP boasts a U.S. equity portfolio of $31.2 billion, with 70% invested nearly equally in stocks from the technology and industrial sectors. Although Icahn Capital held stakes in 24 companies at the end of June, top 10 of its holdings accounted for 91.54% of its equity portfolio.
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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, because these companies allow for a greater capital allocation. 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 on average, 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 ideas performed considerably better, beating the market by 95 basis points per month. This was confirmed 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 118%, beating the broader market by over 60 percentage points (see more details).
Cheniere Energy, Inc. (NYSEMKT:LNG) is not the only energy stock that Mr. Icahn is betting on, as the investor has a significant exposure to oil and natural gas companies. This was one of the reasons why his holding company, Icahn Enterprises LP (NASDAQ:IEP), reported its first quarterly loss since the financial crisis earlier this year. However, Cheniere Energy is one of the companies that he has been the most interested in lately. In early-August, when Mr. Icahn disclosed significantly increasing his stake in the company he also made his activist intentions clear and signaled that apart from engaging with the company’s Board to increase shareholder value, he would also be seeking Board representation. Hence it wasn’t much of a surprise when, on August 24, the company announced that it has increased its Board size by two to 11 to accommodate Jonathan Christodoro and Samuel Merksamer, both of whom serve as Managing Directors at Icahn Capital LP.
Cheniere Energy, Inc. (NYSEMKT:LNG)’s stock has had a gradual decline since the start of April and is currently trading down by 23.5% year-to-date. A minor part of that decline can be attributed to the 6.2% correction the shares had in the two days following the disclosure made by revered short seller Jim Chanos on September 9 that he is shorting the stock. With marquee hedge funds like Icahn Capital and Seth Klarman‘s Baupost Group, which held over 15.36 million shares of Cheniere Energy at the end of June, betting on the stock to go higher in the coming quarters and short-sellers like Jim Chanos taking the other side of the trade, it would be interesting to see which direction does Cheniere Energy’s stock goes in the short to medium-term.
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