Carl Icahn might be probably the most famous investors in history. Throughout the Eighties and Nineties, he became often called an organization raider, buying up big stakes in corporations in an try to force change. Over the a protracted time, he has gathered a multibillion-dollar fortune.
Icahn has never shied away from making big bets. Without delay, he has nearly his entire fortune — some $6.3 billion — tied up in a single stock. Shares are currently priced at historic lows, possibly making this a lucrative technique to bet alongside a legendary billionaire investor.
Billionaire Carl Icahn is betting on himself
It should come as no surprise that Carl Icahn has the overwhelming majority of his money tied up in a company named after himself: Icahn Enterprises (NASDAQ: IEP). Incorporated in 1987, Carl Icahn has long used Icahn Enterprises as his principal investment vehicle. He currently owns greater than 80% of the company, a stake price roughly $6.3 billion. In essence, Carl Icahn is fully answerable for Icahn Enterprises, and the company’s stock price is a direct results of his long-term decision-making abilities.
Icahn Enterprises is a conglomerate business. Meaning it’s a conglomeration of disparate businesses, much of which don’t have anything to do with each other. As of last quarter, the net asset value of those businesses totaled around $4.8 billion. A number of of that net asset value is comprised of various real estate assets, along with a handful of business and automotive businesses. Around two-thirds of the value, nevertheless, is tied up in just two things: a stake in CVR Energy, an oil refiner, and a holding interest in Carl Icahn’s investment funds, which operate individually from the company. So, while Carl Icahn has diversified the operation somewhat, it’s heavily reliant on the performance of every CVR Energy and his investment funds.
Carl Icahn might be going well aware that Icahn Enterprises has concentrated its bets. These bets appear to represent the two areas through which he has the absolute best conviction. With a long-term track record of producing multibillion-dollar fortunes, investors can immediately bet alongside Carl Icahn just by purchasing shares of Icahn Enterprises.
One problem that doesn’t make very much sense
It’s an affordable strategy to take a position alongside legendary billionaire investors. Just take a take a look at Berkshire Hathaway. Patient investors who trusted Warren Buffett have compounded double-digit annual returns for a very long time. But Icahn Enterprises is just not Berkshire Hathaway. Not even close. Since 1998, Berkshire Hathaway stock has risen greater than 1,000% in value. Icahn Enterprises stock, meanwhile, has added just 69% in value. The company, nevertheless, has paid a each day stream of giant dividends. Those dividends close the gap significantly, with Icahn Enterprises delivering a 630% total return over that period. But there’s still no denying that Berkshire Hathaway has proven a superior long-term investment with far less volatility. Plus, in case you had reinvested your Icahn Enterprises dividends back into Icahn Enterprises stock, your total returns would have been well below 630%.
Why, then, does Icahn Enterprises stock appear to trade at a premium to Berkshire Hathaway? On a price-to-book basis — a quite easy metric that gauges how much the market is willing to pay for a company’s assets — Icahn Enterprises currently trades at 2.3 times book value. Berkshire, meanwhile, trades at just 1.6 times book value. There’s even reason to contemplate that Berkshire’s price-to-book multiple is overinflated, provided that the company has repurchased tens of billions of dollars in shares over time. Those repurchases created quite a lot of shareholder value, but due to accounting rules, they’ve suppressed the company’s true book value. Icahn Enterprises, meanwhile, has been issuing latest shares hand over fist. In the course of the last five years, its share count has exploded by 112%.
It’s hard to justify buying Icahn Enterprises over Berkshire Hathaway, especially given the premium valuation. Icahn Enterprises’ portfolio of corporations, it’s hard to argue that anything must be valued above book value. The value of the company’s interest in Carl Icahn’s investment funds, for example, went from $4.2 billion last yr to only $3.2 billion today. Its stake in CVR Energy, meanwhile, which must be valued near book value since it’s a publicly traded asset, has fallen in value from $2.2 billion to only $2 billion over the similar time period. The rest of Icahn Enterprises’ assets aren’t faring so much higher. One amongst its automotive businesses, for example, entered bankruptcy last summer.
Carl Icahn is betting huge sums of money on Icahn Enterprises, but that is probably going because he has to. The company’s value would likely collapse if he suddenly tried to sell all his shares. Because shares trade at an inexplicable premium to Warren Buffett’s Berkshire Hathaway, investors are likely higher off betting with that billionaire than this one.
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Berkshire Hathaway. The Motley Idiot has a disclosure policy.
Billionaire Investor Carl Icahn Is Betting $6.3 Billion on This 1 Stock was originally published by The Motley Idiot