The multilevel marketer
In the midst of the decline, Herbalife Ltd. (NYSE:HLF) longs argued that the company could not be a pyramid scheme because if it were, the FTC would have shut the 30 year old company down a long time ago. They also pointed out that Herbalife Ltd. (NYSE:HLF) made most of its profits from international divisions that were
outside FTC jurisdiction.
Sensing an opportunity, Carl Icahn took a 16.5% stake in the beleaguered company. Half a year later, Herbalife shares are trading around $66, near all time highs. Herbalife Ltd. (NYSE:HLF) fundamentals are doing just as well. In the Q2 earnings report, Herbalife announced earnings of $1.34, up 23% year over year, and that the company signed up a record 80,000 new distributors in the U.S. in the second quarter. To add salt to Ackman’s wounds, fellow hedge fund titan George Soros is rumored to have bought a significant stake in Herbalife Ltd. (NYSE:HLF) as well.
A streaming video giant
In late 2012, Carl Icahn bought 5.5 million shares, or 10%, of Netflix, Inc. (NASDAQ:NFLX) for an average price of $58 per share.
Like Herbalife, Netflix, Inc. (NASDAQ:NFLX) was under pressure from shorts for its business model. Netflix’s critics argued that the streaming video giant would not be able to handle competition from Amazon or Google, both of which had more users, better distribution, and more money on the balance sheet.
Netflix, Inc. (NASDAQ:NFLX) addressed critic’s concerns by trying to build a moat with original Netflix-only shows such as Hemlock Grove, House of Cards, and Lilyhammer. Netflix, Inc. (NASDAQ:NFLX)‘s success at building a moat showed in its subscriber count. Since 2012, despite competition from Amazon, Netflix has grown its subscriber base by 10 million to 29.8 million US subscribers and 8 million
international
subscribers in Q2 2013. Its stock has gone up more than 400% from the price level that Icahn bought Netflix, Inc. (NASDAQ:NFLX) shares.
Despite the rosy present, the future of Netflix is still in question. CEO Reed Hastings believes that Amazon is spending at least $1 billion in content deals a year to give Amazon Prime members unlimited streaming videos. While Amazon Prime currently has half the number of titles as Netflix, Inc. (NASDAQ:NFLX), Amazon is improving that number every day. Google YouTube may eventually challenge Netflix in the future as well. Google has more than $40 billion on the balance sheet and is rumored to be looking to strike deals with content providers. While they may not bankrupt Netflix, the two internet giants will likely sap some of Netflix’s future growth.
An offshore driller
The Department of Justice lawsuit over the Deepwater Horizon oil spill still weighs on Transocean LTD (NYSE:RIG) shares. While Transocean has agreed to pay $1.4 billion over 5 years to settle various criminal and civil charges, parts of the lawsuit are still ongoing and have cast uncertainty on Transocean LTD (NYSE:RIG)’s ultimate liability.
Aside from the lawsuit, the fundamentals for Transocean LTD (NYSE:RIG) are solid. The rig operator has an order backlog of $28.5 billion that should provide earnings visibility going forward. Half of Transocean LTD (NYSE:RIG)‘s revenues come from ultra deepwater rigs that are extremely in demand. Transocean also pays a solid 4.62% dividend and is expected to grow earnings by over 27% a year for the next 5 years.
Conclusion
Even though we may not all be corporate activists, we can take advantage of Carl Icahn’s wisdom and invest in the companies that Icahn likes. From that perspective, Transocean LTD (NYSE:RIG) and Herbalife are buys because of their growth and earnings power. Investors should not heed the corporate titan’s advice on Netflix, however, because it could see tougher competition ahead. Regardless of how the three stocks perform going forward, Carl Icahn will still be going strong.
The article Carl Icahn’s Favorite Companies originally appeared on Fool.com and is written by Jason Bond.
Jason Bond has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix and Transocean. Jason is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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