Carl Icahn: Better Investor Than Buffett?

Carl Icahn doesn’t get enough respect, which may explain why shares of his company are such a bargain.

It was May 2011, and Carl Icahn was speaking at an investment conference in Manhattan. He seemed an odd presence, well dressed but still somehow rumpled, his native Queens, N.Y., accent making him sound more like a garment-industry executive than a Princeton-educated mogul worth billions of dollars.

Icahn, well known in the world of finance as an "activist" investor but relatively unfamiliar to individuals, began by assailing corporate boards. Then it was on to his stock pick. "My favorite stock earned $2.68 a share in the first quarter and sells for $40," he said. "In 2007 it sold for $130. It has great management." He paused. "The management is me, and the stock is Icahn Enterprises."

Icahn had a good case then, and he may have an even better one now. Still selling at $40 in early December, Icahn Enterprises (symbol IEP) trades at a 17% discount to the firm's book value (assets minus liabilities) of $47.84 per share. By contrast, Berkshire Hathaway (BRK-B), which, like Icahn Enterprises, derives much of its value from the investing prowess of its boss (in Berkshire's case, Warren Buffett), sells at an 18% premium to its book value.

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Inferiority complex

At the investing conference, Icahn, who owns 93% of Icahn Enterprises, expressed bewilderment over the disparity. He wondered why his firm, which has holdings in nine industries, traded for less than its book value. "I don't understand why I don't get a premium and Warren Buffett does," he said. The subtext was, "I know you all love Buffett. But what am I, chopped liver?"

All this may perplex Icahn, but it spells opportunity for investors. The opportunity is greater than suggested by Icahn Enterprises' 17% discount to book value. The hedge fund that I run owns the stock, which I think is worth at least $60 a share based on the earnings power of the company's assets and the investing talents of Icahn and his team.

Icahn, 76, is arguably one of the great value investors of all time, and by one key measure may be an even better investor than Buffett. From 1968 through 2011, Icahn compounded the initial $100,000 he invested in his Wall Street firm at a 31% annual rate. Over the same period, the book value of Buffett's Berkshire Hathaway grew 20% annualized. Granted, in neither case are those pure "investment" returns -- each man was running a business as well as buying and selling stocks -- but it's a meaningful comparison nonetheless. And Icahn's returns after Schedule 13D filings (required when a buyer owns 5% or more of a publicly traded company) are extraordinary: an annualized 26.1% through June 30, compared with 7.3% for Standard & Poor's 500-stock index, according to the 13D Monitor, a research service. This is a crucial number for investors because it means they can successfully piggyback on Icahn's investments. For example, on January 13, 2012, Icahn filed a 13D on CVR Energy, with the stock at $23. On November 30, 2012, it closed at $46.

The long-term record of Icahn Enterprises, launched in 1987 as American Real Estate Partners, is also impressive. Despite a staggering 79% share-price decline in 2008, the units (the firm is set up as a master limited partnership) returned an annualized 18.4% over the past ten years through November 30, according to Morningstar. That clobbered both the S&P 500 and the stock of Berkshire Hathaway by an average of 12 percentage points per year.

Modest origins

People have always underestimated Carl Icahn. Almost 60 years ago, he was told that he would never get into Princeton. No one from Far Rockaway High School, located in New York's now hurricane-ravaged Rockaway peninsula, ever had. Plus, he made the stakes even higher by seeking a full scholarship. He got in -- and he got the grant.

Icahn would be more respected if he had never gone into the "greenmail" game. After making a fortune in options and arbitrage (the practice of taking advantage of price discrepancies in different markets) in the 1960s and '70s, Icahn became one of the nation's preeminent practitioners of greenmail, a screw-the-shareholder form of activism of dubious morality. A greenmailer would buy stock in an undervalued company and threaten a takeover or some other radical change. Either the company would eventually be acquired or the greenmailer would promise to leave it in peace if his shares -- and only his -- were purchased at a premium price. When the greenmailer received his payoff, the shares would typically fall.

But greenmail is dead, and Icahn is now a solid corporate citizen. Like Berkshire, Icahn Enterprises is both an investment vehicle and a conglomerate. It is the majority owner of, among other companies, CVR Energy, a refiner and fertilizer producer; Federal-Mogul, an auto-parts supplier; American Railcar Industries, which sells and leases railroad cars; and Tropicana Entertainment, the casino operator. It owns all of PSC Metals, a processor of scrap metal, and WestPoint International, a maker of home textiles.

These days, Icahn is often a shareholder's best friend. He buys stakes in underperforming companies and suggests strategies to boost their value. "A huge amount of the upside in Icahn plays goes to other shareholders," says Ken Squire, founder of the 13D Monitor and the 13D Activist Fund. "He's incredibly smart, and his ability to value a company is second to none."

Icahn is the ultimate contrarian, which may also explain why investors don't mimic his moves as quickly as they do Buffett's. Much of what Icahn buys looks as appetizing as roadkill. He bought Forest Labs in May 2012, two months after its top drug, the antidepressant Lexapro, went off patent. He repurchased Chesapeake Energy in May 2012 as natural gas prices crashed and it looked as if the company might drown in debt. Icahn recently made headlines by buying a 10% stake in Net­flix for $460 million. The purchase mystified some Icahn watchers because the stock isn't cheap on the basis of classic value measures. They assume he's betting that a tech giant will swoop in and buy Netflix.

If it looks ugly, Icahn is intrigued. "When you conclude something is really cheap, you've got to be willing to load up," he says. Other pieces of advice: Be flexible. Don't automatically believe what the market is telling you about value. If you know you're right, stick to your guns.

He still gets a thrill from being right when others are wrong. "When you see a good investment, you know it instinctively," he says. "It's like the feeling Paul Newman described in The Hustler, a kind of click." ("Feel the roll of those balls," Newman's Fast Eddie Felson said in the 1961 movie. "You don't have to look; you just know.")

Like Buffett, Icahn believes that it takes a certain temperament to beat the market. And he says it's crucial that investors not confuse luck with success. "When victorious generals came back to Rome," he says, "they used to have a man behind them saying, ‘All glory is fleeting.' "

Perhaps Icahn would be better known and more admired if he had left a brilliant paper trail akin to Buffett's annual letters to Berkshire shareholders. Icahn seems less interested than Buffett in enlightening other investors -- although, interestingly, it is Icahn's son, Brett, 33, who has turned into an outstanding investor, while none of Buffett's three children has.

The bottom line: Icahn is underappreciated and often misunderstood. Luckily, that gives you a better chance to make money by mimicking his moves when he files a 13D. Or simply buy shares of Icahn Enterprises.

Andrew Feinberg
Contributing Columnist, Kiplinger's Personal Finance
Feinberg manages a New York City-based hedge fund called CJA Partners.