Icahn's Most Promising Small Cap Holdings

by: Insider Monkey

By: Jake Mann

To most investors, large-caps receive most of their focus, which often leaves small-cap stocks less efficiently priced. Understandably, hedge funds seek to take advantage of this phenomenon by dedicating their research teams to work on the financial world's lesser-known companies. Interestingly, our analysis at Insider Monkey shows that the most popular small-cap stocks among hedge funds outperformed the market by more than 15 percentage points per year over a 10-year analysis period (learn more about this here).

With this in mind, we're going to focus on one mammoth hedge fund in particular: Carl Icahn's Icahn Capital. According to his latest 13F filing with the SEC, Icahn has an equity portfolio in excess of $11 billion, but let's just concentrate on his top five small-cap holdings (see all of Icahn's stock picks). Each stock listed here had a market capitalization between $1 billion and $5 billion at the end of the third quarter, which is the same standard used in our analysis mentioned above.

First up we have Icahn Enterprises, L.P. (NYSE:IEP), which is Carl Icahn's No. 1 holding, making up 35% of the hedge fund manager's 13F portfolio. As its name suggests, Icahn owns approximately 87% of Icahn Enterprises' outstanding shares. Formerly known as American Real Estate Partners, IEP owns a number of different subsidiaries operating in the auto, gaming, real estate, food packaging and investment businesses, to name a few.

The company has generated revenue growth above 30% in each of the past three years, and sell-side analysts expect it to grow EPS by more than 250% this year. At 10 times earnings, IEP is clearly undervalued, and it's obvious that Carl Icahn, who's always focused on value-stimulation, will be a favorable asset moving forward. Horizon Asset Management and Murray Stahl also hold a modest position in IEP (check out this hedge fund's $3.2 billion equity portfolio).

CVR Energy, Inc. (NYSE:CVI), meanwhile, is Icahn's second largest small-cap investment. CVR Energy has appreciated quite a bit over the past 1-month (20.2%), 3-month (56.2%), 6-month (100.3%), and 12-month (130.5%) time periods, indicating that Mr. Market is betting on a domestic energy boom with this stock. Despite its strong performance recently, shares of CVR still trade below 9 times forward earnings, and are below parity with regard to CVR's sales value. Like IEP, Icahn owns a majority stake in CVR, and over the past two years, he's spun off the company's fertilizer and refining segments.

The Hain Celestial Group, Inc. (NASDAQ:HAIN) is Carl Icahn's third largest small-cap holding. Shares of the food processing company, which has a focus on organic products, had a stellar first half of 2012, but have since fallen off. The stock is down 3.2% over the past six months, and most valuation metrics indicate that it's fairly valued.

The lack of a dividend limits Hain's investor base to those wanting exposure to health-conscious foods, which is an industry that's seeing an increasing level of competition. Furthermore, private-label brands still have a place in consumers' pantries, which is also a long-term negative. Still, one can't argue with Hain's growth prospects-the Street predicts 16-17% annual EPS growth through 2017-but we'd wait for a better entry point before mimicking Icahn here.

Mentor Graphics Corp (NASDAQ:MENT), a manufacturer of electronic design automation equipment, is Icahn's fourth largest small-cap holding. Mentor's EDA systems are used in the production of various types of electronic equipment, from fluid dynamics to silicon chips. Mentor's stock price has returned a solid 22.5% over the past 12 months, and it has beaten analysts' earnings estimates in the first three quarters of FY2013. Mentor reports its Q4 financials in late February, and a sub-1.0 PEG indicates that there's more room to pop if solid results are shown. Wall Street's average price target on Mentor represents an 18% upside from current levels.

Oshkosh Corporation (NYSE:OSK) is Icahn's fifth favorite small-cap. The billionaire did initiate a slight sell-off of this stock in a 13D filing with the SEC late last year, and as we originally reported, "Icahn's hopes of turning around the company appear to be diminished." It was assumed by many investors that Icahn would push for a spin-off of Oshkosh's defense segment to stimulate value creation.

Despite the fact that this has not occurred, investors have pushed shares of Oshkosh up a whopping 38.9% over the past month, on the back of a blowout first quarter (FY2013) earnings report. The company reported a 51-cent EPS for the period, 17 cents above the Street's consensus. More importantly, Oshkosh also raised its full-year guidance by 18%, and shares still trade at cheap PEG (0.9) and forward P/E (13.4x) metrics. With this stock, investors can gain exposure to a bullish segment of the economy moving forward, and most importantly, it's still at an attractive price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article is written by Insider Monkey's writer, Matt Doiron, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.