Freeport-McMoRan Inc. (FCX) Surges As Carl Icahn Receives Two Board Seats

Even though Carl Icahn emphasized that the U.S stock markets are overvalued in a recent video released on his website, he keeps buying more shares of seemingly undervalued companies. Just a few weeks ago, he disclosed an ownership stake of exactly 100 million shares in Freeport-McMoRan Inc. (NYSE:FCX) via an amended 13D filing, which accounts for 8.80% of the company’s outstanding shares. Earlier this morning, the company’s officials and Icahn announced an agreement has been reached between them, under which two of Icahn’s representatives have been appointed to Freeport-McMoRan’s Board of Directors. Shares of Freeport-McMoRan have gained just under 10% in trading today on the news.

It is unbelievable in one sense how the market reacts to Icahn’s every move, though not when we consider his track record of helping companies and unlocking shareholder value. The American billionaire investor is widely-known as one of the greatest activist investors in history, and has shaken up numerous companies throughout his investment career. Most importantly, Icahn does not seek to generate short-term gains from his activist campaigns, as some of his peers, but focuses instead on fixing companies for a profitable longer-term spectrum. Just recently, he reported lifting his stake in Cheniere Energy Inc. (NYSEMKT:LNG) to 28.8 million shares or 12.07% (read more details here). As stated by Icahn’s 13F filing for the June quarter, Icahn Capital LP manages an equity portfolio with a market value of $31.20 billion.

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 118%, beating the broader market by 60 percentage points over the past 36 months (see the details).

Freeport-McMoRan Inc. (NYSE:FCX) received extra attention from the hedge fund industry during the second quarter, as the number of top money managers invested in the stock increased to 41 from 31 quarter-over-quarter. At the same time, the value of their holdings more than doubled during this time span, increasing to $581.83 million from $258.10 million. Nonetheless, it is also worth mentioning that the hedge funds tracked by Insider Monkey collectively owned just 3.00% of the company’s outstanding shares on June 30, though this figure is much greater now following Icahn’s large purchase. Meanwhile, Stanley Druckenmiller’s Duquesne Capital added a 3.55 million-share position in Freeport-McMoRan during the second quarter, making it one of the largest shareholders of the company within our database.

Let’s refocus our discussion on the recent agreement between the two parties. Under the terms of the agreement, Andrew Langham and Courtney Mather have been appointed to Freeport-McMoRan Inc. (NYSE:FCX)’s Board of Directors. The former has served as General Counsel of Icahn Enterprises L.P. since January and previously acted as Assistant General Counsel, while the latter has been a Managing Director since April 2014. This move comes after the company reduced its Board size to just nine members from 16 earlier this week. Icahn has declared that he is satisfied with the agreement, which also stipulates that the company cannot implement any poison pill defense strategies. In a press release on his website, the activist investor also asserted that two seats on the Board would be enough to unlock shareholder value at the company, as he and his team have done so many times in the past.

Earlier this week, Freeport-McMoRan disclosed its intentions to find strategic alternatives for its oil and gas business that could enable it to “achieve self-funding” from its own resources and cash flows. One of the options that the company is considering is a potential public offering of a minority interest in the business. Freeport-McMoRan reckons that the high quality of its oil and gas holdings, the potential of its Deepwater Gulf of Mexico infrastructure, and its highly-experienced workforce represent great assets that might create value.

Considering that the world’s largest publicly-traded copper producer has seen its stock surge on today’s announcement, it might be foolish to disregard a potential investment in the stock. Even though Freeport-McMoRan has been operating in a low-price commodities environment lately, the stock appears to be trading at an attractive level at the moment.

Disclosure: None