Follow Icahn To The Edge Of 'The Cliff' With These Choice Stocks

Includes: CHK, HAIN, TTWO
by: Marc Courtenay

"When new money is created on a grand scale, it must go somewhere and have some major consequences. One of these will be greatly increased volatility and instability in the economy and financial system." -- J. Anthony Boeckh, Ph.D (Chairman, Bank Credit Analyst 1968-2002,The Great Reflation, Boeckh Investment Letter)

The above quote helps to explain what we're experiencing in the investment markets at the present time. The good news is that volatility and "instability in the economy and financial system" leads to more frequent opportunities to buy low and sell high.

That allows activist investors like Carl Icahn to use market pullbacks to secure positions in companies that have either hidden or under-appreciated assets or unexploited wealth potential. Mr. Icahn isn't fretting about the so-called "fiscal cliff", and from a stock pricing perspective he apparently likes the view.

One company that Icahn has been accumulating of late is Hain Celestial Group (NASDAQ:HAIN). On Nov.13th Mr. Icahn, who is a "Beneficial Owner" (owns 10% or more of the outstanding shares) purchased another 75,000 shares at $58.97 per share. That's more than $4,422,750 worth of HAIN stock.

Hain Celestial, as you may realize, manufactures, markets, distributes, and sells natural and organic products in 50 countries around the globe. For the past 10 years it's been buying brands and specialty labels as well as a wide assortment of small, sometimes privately owned companies that makes everything from exotic teas, personal grooming products and baby care items.

The share price of Hain has more than tripled in the past 3 years as sales have soared. In a recent article in Barron's author Bill Alpert opined that, "Hain could find it tough to sustain the growth rate that has propped up its pricey shares. If, for example, competition weighs upon hit products or Hain falls off its acquisition pace, the stock could lose its premium multiple and spill, by our estimate, roughly a third of its value."

That's the most likely alibi for Hain shares unexpected 4% drop on Monday November 26th on average volume. This may set the stage for investors to be able to join Carl Icahn in ownership of Hain stock at prices closer to what he paid for it earlier this month.

As we can see in the chart below, HAIN has seen tremendous growth in its share price punctuated by some precipitous corrections. Monday's drop is bringing the Relative Strength Indicator (RSI) down towards oversold levels.

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RSI is clearly heading lower, and shares of HAIN may test the Nov.2nd intra day low of $56.57 as the RSI reaches its nadir.

The very popular RSI or Relative Strength Indicator, is a momentum oscillator that compares the strength of gains against the strength of losses over a given period. RSI always ranges between 0 and 100.

Values below 30 and above 70 are typically taken as oversold and overbought respectively. A strengthening RSI indicates that gains are tending to dominate losses. Once the RSI climbs above 70, however, the sustainability of the gains is called into question.

CEO Irwin D. Simon owns almost 928,000 as of Nov.17th, so between Mr. Icahn and Mr. Simon there's a level of insider commitment that bodes nicely for the stock going forward. Analysts consensus 1-year target price for HAIN shares is slightly above $70.

HAIN is also a news-driven stock, and my sense is that some positive news is on its way. With over $360 million in debt (most recent quarter) and operating cash flow of $126 million, some disparities will need to be addressed. I'll be watching the forward (1-year) PE ratio to see if it drops below 20. The PEG ratio is at a balanced level at 1.52.

Most of us already know that Carl Icahn and his investment company own over 50 million shares of Chesapeake Energy (NYSE:CHK), which is over 7.5% of the outstanding shares of the company. I find it curiously odd that on the same day that HAIN was correcting nearly 4%, shares of CHK were down over 3%.

With its current 35 cents-per-share dividend and a forward PE of around 12, I'd feel comfortable buying some shares of CHK if it came close to its Nov.16th intra day low of $16.30. On Nov.11th Director Frederic Poses purchased 266,000 shares at $16.92 a share.

The smart money folks like Mr. Poses usually don't make a $4.5 million investment in one day if they think there's too much downside risk. I agree with the analysts' consensus of a 1-year price target on CHK above $23-a-share.

One company that Mr.Icahn has been investing in of late is Take Two Interactive Software (NASDAQ:TTWO). The company develops, markets, and publishes interactive entertainment for consumers in the United States and internationally.

TTWO products are designed for console gaming systems, such as PlayStation 3 and PlayStation 2, Xbox 360, and Wii. They're also used by handheld gaming systems that consist of DS, 3DS, and PlayStation Portable as well as personal computers, including smartphones and tablets. Take-Two Interactive Software, Inc. delivers its products through physical retail, digital download, online platforms, and cloud streaming services.

The company sells its software titles to retail outlets in North America, Europe, and Asia through direct relationships with retail customers and third-party distributors. Interestingly it was founded in 1993, the same year HAIN got its start.

In the most recent quarter ending Sept.30th, TTWO saw its quarterly revenue growth mushroom 155%. With its total cash of over $328 million it can boast of a Total Cash Per Share of $3.62. That's amazing for a company with a share price of $12.50 trading at a forward (1-year) PE ratio of only 5.

Mr. Icahn purchased 1,407,959 share during a 5-day buying spree November 12th through Nov.16th at prices-per-share of $10.92 to $11.50. He is a "Beneficial Owner" of TTWO controlling more than 10% of the outstanding shares.

The following chart gives us the share price history of TTWO and its RSI. It is self-evident that there's a strong correlation between RSI and the price of the shares. Will the price-per-share consolidate during the next week, offering investors a chance to buy closer to the levels where Mr. Icahn made his recent purchases? Consider buying if they do. "Fiscal cliff" or not, insiders and beneficial owners are buying too.

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Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in HAIN, CHK, TTWO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.