The Icahn Lift: Let Carl Icahn Give You Double-Digit Gains

If you owned Apple Inc. (NYSE: AAPL) stock , you saw a 5% jump in shares on August 13, when Carl Icahn tweeted that he held "a large" position in Apple.

Same with Netflix Inc. (Nasdaq: NFLX), when shares spiked as much as 14%, back on October 31, 2012, when Icahn's regulatory findings revealed he held a tidy 10% stake in the company.

So, what's the secret to pocketing these double-digit gains?

Both came about thanks to the moves of one legendary investor, one "self-made man" worth about $20 billion today...

The good news: He's not done, and you have a chance to profit from him, as we'll see.

But to understand what Carl Icahn can do for you, you need to understand how he got here...

Who Is Carl Icahn?

A medical school dropout of the archetypal postwar American middle class, Icahn arrived on Wall Street in 1961 as a stockbroker at Dreyfus & Company. By 1968, he had a seat on the New York Stock Exchange, while he incorporated Icahn & Co., which dealt in risk arbitrage and options.

Options - as we know them today - were still in their infancy, and far from the mainstream.

That means Icahn was trading options five and six years before the Chicago Board Options Exchange was operating and providing a concrete platform for trading options. He was trading options before the Black-Scholes model, which guides the valuation of an option, was published.

That Icahn would take on this sort of risky security is very telling...

Icahn Gathers Momentum

It was 1978 when Icahn's jump to "big shot" status really started...

This is when he began investing to obtain controlling interests in various companies where he saw potential.

Icahn would gain control of a company through stock purchases and then work his will. He could outsize positions in companies - anywhere from 20% to 40% of available shares - and then threaten a takeover, only to collect a premium on the stocks when the terrified board would organize a buyback.

Or he would go through with it all and use majority positions to buy those companies. This would be the genesis of his life as a corporate raider and greenmailer - an archetypal figure of the freewheeling "Reagan 80s." Greenmailers are corporate raiders who buy large amounts of a company's stock and force the target to buy back the stock at a substantial premium to avoid a takeover. The sole goal is for the greenmailer to profit - very often, the company itself suffers.

For example, when Icahn acquired Trans World Airlines Inc. he nearly killed the company for his own benefit. After acquiring 20% of the company's shares, while making a very successful try at greenmailing the board, he followed through and purchased the entire company.

Icahn bought TWA in 1985. His move to take the company private came in 1988. This netted Icahn close to $500 million, but left the company itself with more than that amount in debt - $540 million.

Icahn sold off TWA equipment by the ton. In 1991 he sold TWA's prized routes to London Heathrow Airport. They went to American Airlines, which would end up buying and absorbing TWA in 2001 for close to $445 million.

TWA survived under Icahn, not because of him, but despite the man's efforts. In one instance, he intimated that he was going to place a large order for aircraft. Employees were expecting something on the order of 100 shiny new airplanes. They got 12.

Employees complained about draconian measures on the ground, and an atmosphere of constant surveillance.

TWA was beleaguered ever after. There were huge labor costs and costly labor disputes. The company had an aging fleet and a reputation for never arriving on time. The airline "grew," when Icahn acquired Ozark Airlines, but it was only Icahn who benefitted from this growth.

Bankruptcy came in 1992.

TWA limped onward into 2001, but it was never really the prestige marquee brand it once was. But Carl Icahn was becoming a prestigious marquee in his own right.

Even then, he was only really just getting started...

One By One, Dominos Fall

Icahn would go on to become the biggest shareholder in Texaco, attempting to instigate huge changes in management and embroiling the company in a $3 billion dispute with Pennzoil over Texaco's takeover of Getty Oil Company.

United States Steel Corp. (NYSE: X) and CEO David Roderick actually succeeded - for a time - in their efforts to prevent Icahn from taking over the company. He was still the largest single shareholder.

The list of companies Icahn bought, gained control over, or simply turned upside down includes Western Union, Viacom, Marshall Fields... more than 20 companies.

All this has led Carl Icahn to where he is now - the world's 53rd richest man. His reputation as a raider has mellowed somewhat, although that's more to do with the explosion in takeover activity in the meantime than any real throttling back on Icahn's part.

These days, Carl Icahn is arguably most famous for being an "activist shareholder."

Now it's not so much that companies fall to Icahn, but some of the biggest, baddest CEOs in America find themselves in Icahn's crosshairs. Through proxy fights, Carl Icahn has managed to knock off Jerry Yang of Yahoo! Inc. (Nasdaq: YHOO) and Blockbuster's John Antioco.

And then there are the CEOs he wants to take out, whom he has publicly called out and criticized, or whose heads he has called for.

The Headhunter Strikes

When Carl Icahn begins to criticize a CEO, it's as though Corporate America becomes old Ireland. Icahn is like the banshee, whose midnight howling precedes the death of kings.

Once Icahn begins to howl, there's nothing to do but put on your armor and wait for the king to croak.

With virtually every company he targets, his first - and loudest - demand is to get rid of the CEO. Michael Dell, of Dell Inc. (Nasdaq: DELL), has lately been the subject of Icahn's wrath.

He's currently suing Dell in an effort to thwart Michael Dell's $24 billion buyout bid. Why?

Because Icahn wants Dell for himself.

The man has grown his empire considerably, with takeovers, intimidating real estate holdings, and now a hedge fund. But he has come to discover that one needn't be an owner, or even a majority shareholder, to make serious waves.

New Methods Emerge

Lately, Icahn's modus operandi seems to be to acquire a large enough chunk of shares, say 5% or 15%, to make himself a force in corporate affairs. He's limited his exposure, his overall involvement in this way, but he's still a shareholder to be reckoned with.

He doesn't need the hassle of owning more than 50% of the shares. He just needs enough to get his foot in the door.

In some cases, as we've seen with Apple Inc. (Nasdaq: AAPL) this month, all Carl Icahn needs to do is open his mouth.

This phenomenon is known as the Icahn Lift, and it's a bit more concrete than the banshee.

Icahn took to Twitter to reveal that he actually owns "a large position" in Apple: "We currently have a large position in Apple. We believe the company to be extremely undervalued. Spoke to Tim Cook today. More to come." To which an unknown Twitter-meister - perhaps Tim Cook himself - somewhere in Cupertino, replied: "We appreciate the interest and investment of our shareholders. Tim had a very positive conversation with Mr. Icahn today."

And that was all it took. AAPL shares, which had been thoroughly underwhelming as of late, took off like a shot and added more than $12 billion in value to the company.

Need a Lift?

As it turns out, the Icahn Lift isn't hard to nail down. There's no fool-proof method - other than landing in Icahn's inner circle - but there are some steps to take when trying to spot Icahn's next target:

  • Foundering shares...
  • A company with a product that represents a solid proposition...
  • The interest of Carl Icahn in making huge sums of money...
  • Add just the smallest portion of what Robert Strange McNamara called "that indefinite interaction," a catalyst, if you will...

Now you can calibrate your radar - your "carldar" - fairly well with the first two or three elements. Identify those and watch them closely, because there's a better-than-average chance that Carl Icahn is doing the same.

Carl Icahn is a dreamboat, but he's not the only game in town - not by a long shot. Have a look at some other great picks, poised for nice rides throughout 2013. Click here for the list.