Activist investor Carl Icahn of Icahn Capital LP is well acquainted with the importance of small cap companies in terms of exceptional returns, as three companies among his 10 largest holdings in terms of value are from the small-cap space. These companies are CVR Energy, Inc. (NYSE:CVI), Federal-Mogul Holdings Corp (NASDAQ:FDML) and Herbalife Ltd. (NYSE:HLF).
We have decided to look into Icahn’s largest small-cap holdings because these companies fall in line with our research in which we found that smaller investors don’t have an advantage in beating the market by following the most popular stock picks of hedge funds, which are invariably large cap companies, but rather by immitating their picks in the small-cap spage. We have formulated a strategy based on 15 most popular small-cap stocks among over 700 large investors. This strategy has beaten the S&P 500 ETF (SPY) by a staggering 79.4 percentage points since August 2012 through March 2015 and posted a cumulative gain of 132% during that period.
As far as Carl Icahn’s investment strategy is concerned, he doesn’t believe in momentum stocks because the momentum can break and often enough there is nothing to stop that fall. Instead he looks at worn out companies, or even industries that have fallen out of favor, takes activist stakes in them, makes structural changes to bring them back to profitability and then exits after making a healthy profit. He is often seen as trouble by the management of the companies he invests in, while shareholders might see him as a saviour. Market value of Icahn Capital’s equity portfolio towards the end of 2014 stood at $31.90 billion and since Icahn is not very keen on making significant changes in his portfolio, the turnover ratio stood at 9.52% during the fourth quarter.
With 77.20 million shares valued at $2.86 billion at the end of the fourth quarter, CVR Energy, Inc. (NYSE:CVI) represents the largest small-cap stake in Icahn’s portfolio. Icahn initiated a position in the holding company engaged in petroleum refining and nitrogen fertilizer manufacturing, during the last quarter of 2011 and saw the stock advance by some 54% since then. A major increase in the stake was however made in the first quarter of 2012, when Icahn gained ownership of nearly 90% of the company’s outstanding stock, and spun off the company’s refining business as a master limited partnership. The recent dip in oil prices has cut into CVR Energy’s top and bottom lines, but the company has a relatively high dividend yield of 4.88% which ranks it among the top tier of its peers in the Oil & Gas refining and marketing industry.
Among over 700 hedge funds that we track 14 funds had nearly $2.9 billion invested in the company as compared to 9 funds with $6.4 billion in the previous quarter. Joel Greenblatt’s Gotham Asset Management is another shareholder of CVR Energy, Inc. (NYSE:CVI) with 271,100 shares valued at $10.50 million.
Icahn’s second largest small cap holding is represented by Federal-Mogul Holdings Corp (NASDAQ:FDML), in which the investor owns 121.11 million shares valued at $1.95 billion. The stake, which remained unchanged during the fourth quarter, comprised 6.11% of Icahn Capital’s portfolio value. Mario Gabelli’s GAMCO Investors also holds some 6.03 million shares of Federal Mogul valued at $96.99 billion, according to its 13F filing.
