One has to be careful when trying to run with the big dogs. Billionaire investor Carl Icahn stirred market excitement on Tuesday afternoon following his Twitter announcement that he has accumulated a large position in Apple (AAPL). While the stock was already trading up +1.6% prior to the revelation, it immediately soared another +4.1% once the septuagenarian legend posted what was his eleventh tweet to his new social media account. For those that already owned Apple shares, this was certainly a welcome surprise to close out the trading day. But for those considering an allocation to Apple following the announcement, it may be worthwhile to resist trying to ride Icahn's coattails higher by simply chasing this trade. Instead, patience may now be warranted before adding a position.
The rationale for Icahn's purchase of Apple shares is certainly sound. The company boasts a pristine balance sheet with relatively little debt and the ability to leverage up substantially to fund a major stock buyback. It also trades at a low absolute price-to-earnings valuation. Of course, these observations are also well established, as scores of investors had been echoing these claims for months when the stock was in the process of falling by over -40% from its September 2012 peak. But such statements carry particular weight when coming from a person with the stature of Mr. Icahn, hence the explosion higher in the stock price.
All of this raises an obvious question. Does it make sense to follow Mr. Icahn by adding a position in Apple shares? Even without the Icahn announcement, such a move would be subject to lively debate. The stock had already advanced by +23% in just over a month from its late June lows before Icahn announcement. It is now up +28% from its lows and is currently very overbought from a relative strength and momentum perspective. This does not mean that Apple cannot rise further from here, particularly since Tuesday's move propelled the stock decisively above both its 200-day moving average as well as a critical resistance level at $475. But it suggests that at a minimum some price consolidation may be in order following this recently robust advance.
An added point is worth exploring on this point that stretches beyond Apple itself. This, of course, is not the first time that Carl Icahn has established a large stake in a publicly traded company. As a result, it is worthwhile to reflect back over the last few years on similar instances when it was revealed that Mr. Icahn had made a major purchase in other companies to explore how the stock price performed in the days that followed. It should be noted that this review excludes special situation names like Dell (DELL) and Herbalife (HLF) that have additional considerations beyond his generally more traditional purchase announcements.
On April 2, 2013, Mr. Icahn announced that he owned an over 9% position in Nuance Communications (NUAN). The stock exploded higher that same day, but subsequently entered into a consolidation phase that had the stock trading lower for much of April. While the stock eventually broke out to new highs toward the end of April, it traded above initial Icahn announcement levels for only four days before gapping back lower and fading into the summer at prices well below the Icahn induced surge.
The story associated with Netflix (NFLX) was more positive. On October 31, 2012, it was revealed that Icahn had purchased a 10% position in Netflix. The stock immediately soared that day, only to enter into an extended consolidation phase that saw Netflix trade below its intraday high for the next month. It was not until early December that the stock pushed ahead to new highs.
The same cannot be said for Clorox (CLX). On July 15, 2011, Mr. Icahn announced his offer to purchase the consumer product firm for $76.50 a share. For those that have followed Clorox over the years, the idea that the company would sell at any price, much less at a bid that represented just a +14% premium over its recent intraday highs, represented a tall order even for someone with Mr. Icahn's influence. Nevertheless, Clorox shares surged nearly +10% on the announcement. But the stock price almost immediately retreated and save a brief moment of trading above the initial peak three trading days later, Clorox shares soon found themselves trading well below the pre-Icahn announcement levels as a sharp decline in the broader market as measured by the S&P 500 Index (SPY) into early August 2011 pulled nearly everything down with it. And it was not until more than a year later in October 2012 before Clorox finally climbed above these initial July 2011 peaks.
Hain Celestial Group (HAIN) was yet another instance when patience was required. On May 14, 2010, Mr. Icahn revealed that he owned a 12% position in the company. In this instance, nearly all of the advance was already baked in to the stock price by the time of the announcement, as Hain had already been bouncing back briskly following a sharp gap lower earlier that month. Nonetheless, the stock gained +7% on the announcement. But barring a brief stretch of trading days over a month later in June 2010, Hain's stock price consolidated these gains throughout the summer and did not break out to the upside until Fed Chairman Ben Bernanke's heavy hint at Jackson Hole that year that QE2 would soon be on its way.
The experience with Yahoo! (YHOO) back in 2008 is yet one more example of patience being warranted. On May 13, 2008, Mr. Icahn announced he had purchased a major stake in the company. The stock advanced by over +6% that day and continued on to trade incrementally above the initial advance price for the rest of May. But Yahoo! eventually surrendered these gains and broke to the downside. It was not until the last few months over five years later before Yahoo's stock price returned to these initial Icahn announcement levels.
Carl Icahn is an accomplished investor. After all, he is a billionaire for very good reason. But just as it is the case with many of the great investors of our time including Warren Buffett, it is important to remember that they are playing a different game than the masses in investment markets. As a result, investors should exercise caution when following Mr. Icahn into some of his major trades after they have been revealed. For recent experience suggests that an extended period of consolidation often follows the initially strong Icahn induced price spike. And in some cases, these initially strong gains can be followed by equally staggering declines, particularly if the broader market takes a turn for the worse.
As a result, those considering a stake in Apple following Mr. Icahn's announcement may be best served to take a more patient approach. For while Apple shares may certainly advance higher from here, recent history suggests a period of consolidation at minimum may soon follow the recently strong advance.
Disclaimer: This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.