Three Recent Activist Moves By Carl Icahn and Other Fund Managers

Numerous articles published by reputable financial websites discuss the awful performance of activist hedge funds this year, suggesting that their ideas are becoming less profitable, among other things. These articles provide as an example the disappointing returns generated by Carl Icahn and Bill Ackman. The godfather of activist investors, Carl Icahn, saw his fund decline by 10.3% in the third quarter, delivering a loss of 2.8% for the year through September. This uncommon performance of Icahn’s portfolio was mainly attributable to its high exposure to the energy sector, but that does not suggest that shareholder activist has been less efficient or less profitable lately. Truth be told, activist hedge funds do not necessarily have to shake up all companies they invest in. Having this in mind, this article will investigate two 13D filings on a single company submitted by Carl Icahn and his former protégé Mark Rachesky, and a separate filing submitted by Eric Semler’s TCS Capital Management.

Following activist funds is important because it is a very specific and focused strategy in which the investor doesn’t have to wait for catalysts to realize gains in the holding. An activist fund can simply create its own catalysts by pushing for them through negotiations with the company’s management and directors. In recent years, the average returns of activist hedge funds have been much higher than the returns of an average hedge fund. Furthermore, we believe do-it-yourself investors have an advantage over activist hedge fund investors because they don’t have to pay 2% of their assets and 20% of their gains every year to compensate hedge fund managers. We have found through extensive research that the top small-cap picks of hedge funds are also capable of generating high returns and built a system around this premise. In the 38 months since our small-cap strategy was launched it has returned over 102% and beaten the S&P 500 ETF (SPY) by more than 53 percentage points (read more details). Soon, we’ll be releasing a new quarterly newsletter written by former activist hedge fund analyst Michael Bland that tracks ten or so activist campaigns at any given time.

According to two 13D filings submitted by Carl Icahn and Mark Rachesky’s MHR Fund Management on Navistar International Corp (NYSE:NAV), the two activist firms plan to consult and coordinate a potential purchase of non-convertible debt of the truck manufacturer. It should be mentioned that Icahn Enterprises owns 16.27 million shares of Navistar, while MHR Fund Management currently holds a 16.26 million-share position, which accounts for 19.9% of the company’s outstanding common stock. It seems that the two activists intend to assist the struggling manufacturer of commercial and military trucks, proprietary diesel engines, school and commercial buses in improving liquidity, which might help the company to regain market share following the transition from its Advanced Exhaust Gas Recirculation only engine technology to an SCR engine technology (the company abandoned efforts to develop its EGR technology to meet 2010 EPA emission standards back in 2012). Navistar International Corp (NYSE:NAV) has suffered significant losses in the past several years, and has been attempting to recover from the aforementioned transition in treatment systems. The company reported net sales of $10.1 billion in 2015, which marked a decrease of 6% year-on-year. Navistar managed to regain some market share in the Class 6 and 7 medium trucks sector (market share increased to 23% in 2015 from 21% reported in 2014) and school buses sector (up to 38% from 35%), but lost some market share in the Class 8 heavy truck segment (down to 11% from 14%) and Class 8 severe service trucks segment (decreased to 15% from 16%).

Meanwhile, the shares of Navistar are down by 75% so far in 2015 and are trading at a forward price-to-earnings ratio of 4.35, which is significantly below the ratio of 17.19 for the S&P 500 companies (analysts and executives anticipate that the company will become profitable in 2016, after posting its 13^th consecutive quarterly loss). The company received more attention from the hedge funds tracked by Insider Monkey during the third quarter, as the number of smart money investors with positions in the company increased to 25 from 16. However, the overall value of their investments shrank to $534.14 million from $946.15 million quarter-over-quarter. Hedge funds monitored by our team amassed 51.40% of the company’s outstanding shares on September 30. Ken Griffin’s Citadel Advisors LLC owns approximately 280,000 shares of Navistar International Corp (NYSE:NAV) as of September 30.

Let’s head to the next page of this article, where the 13D filing submitted by TCS Capital Management is closely examined and discussed.