These Carl Icahn Holdings Show Us How He Picks His Stocks

How do activist investors like Carl Icahn pick their targets? It's a question a lot of investors will have after the string of new positions activist investors have taken in big-name stocks.

ichanFor instance, the Carl Icahn holdings now include Xerox Corp. (NYSE: XRX), the activist investor disclosed yesterday (Tuesday). Icahn now has a 7.1% stake in the 109-year-old Xerox.

It's the latest marquee target for Icahn, who in recent weeks has added large stakes in iconic insurer American International Group Inc. (NYSE: AIG), mining giant Freeport-McMoRan Inc. (NYSE: FCX), and PayPal Holdings Inc. (Nasdaq: PYPL), freshly spun off from eBay Inc. (Nasdaq: EBAY).

And Carl Icahn wasn't the only activist busy in Q3. The 13F filings that became available this week showed Bill Ackman raising his stake in the besieged Valeant Pharmaceuticals International Inc. (NYSE: VRX) to 9.9%.

Dan Loeb pumped up his holdings in Baxter International Inc. (NYSE: BAX) to 9.8%. And Nelson Peltz's Trian Fund Management increased its stake in food distributor Sysco Corp. (NYSE: SYY) from 3.56% to 13.78%.

Because activist targets are often widely held, it behooves investors to know what might put stocks they own in an activist's sights.

Let's use the Carl Icahn holdings as an example.

What Carl Icahn Holdings Tell Us About How Activists Work

Like all investors, activists look for undervalued companies. But because they can buy such large stakes, activist investors also look for companies they can push into strategic moves they believe will create shareholder value.

Take Xerox. Icahn hasn't disclosed his plans yet, but he could try to get Xerox to sell its equity stake in the Fuji Xerox joint venture or advocate for the separation of the company's documents and IT services operations.

Icahn did say he would pursue a seat on Xerox's board to help him persuade management to consider his suggestions - a common Carl Icahn tactic.

Xerox stock is down more than 22% on the year and reported its first quarterly loss in five years in October. Those are the kinds of characteristics that tend to draw the attention of activist investors like Carl Icahn.

Here's what a PricewaterhouseCoopers study of activist investing released earlier this year said most attracts Icahn and his ilk...

How Activist Investors Pick Their Targets

The study said activist investors look for:

  • A company with a "low market value relative to book value, but is profitable, generally has a well-regarded brand, and has sound operating cash flows and return on assets."
  • A company with "cash reserves [that] exceed both its own historic norms and those of its peers."
  • A multi-business company in which "one or more of the company's business lines or sectors are significantly underperforming in its market."
  • If institutional investors own most of the company's stock.
  • The company's board members are "stale," with few new directors in recent years, which often adds to shareholder dissatisfaction.

So let's go back to the Carl Icahn holdings to see this thinking at work.

Icahn targeted Apple Inc. (Nasdaq: AAPL) starting in 2013, despite it being an extremely successful company.

But while Icahn liked (and continues to like) Apple's business, he thought the company had way too much cash on its balance sheet. So he lobbied Apple CEO Tim Cook for a fatter dividend and more stock buybacks.

Cook, and Apple's board, came around to Icahn's way of thinking. Since 2013, Apple has spent over $104 billion on stock buybacks and returned $143.5 billion to shareholders in the form of dividends.

In the case of eBay, Icahn believed a spin-off of the PayPal unit would unlock shareholder value. Although eBay at first resisted, one year later it announced it would do as Icahn suggested.

EBAY stock is up 31% since it announced last September that it would spin off PayPal.

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With AIG, another of the newer Carl Icahn holdings, it's a beef with the board. He said AIG's management has no plan to unlock value for shareholders.

But Icahn does. He's suggested AIG split itself three ways into a property casualty coverage company, a life insurance company, and a mortgage insurance company. So far the AIG board has resisted, but Icahn is working to get other AIG shareholders to back him.

Don't be surprised if he wins. Either way, he'll keep adding to the Carl Icahn holdings in his never-ending search for more activist targets.

Follow me on Twitter @DavidGZeiler or like Money Morning on Facebook.

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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