If Carl Icahn Has A Stake, Should You?

by: Bill Maurer

We've all seen those commercials for "the most interesting man in the world", advertisements for Dos Equis beer. In the stock market today, there may not be anyone more interesting than Carl Icahn. The billionaire investor has been known for his aggressive style which has certainly worked over time. Today, I'm here to look at a couple names he currently has a stake in, along with one he recently exited. If Carl Icahn is investing in these names, should you be as well?


Icahn initiated a position in Apple a few months ago, and he has been looking for the company to unlock some of the cash the company holds on its balance sheet. Apple had more than $146 billion in cash and investments at the end of fiscal Q3 (calendar Q2), but only about $40 billion was located inside the US. Apple can't use the foreign monies for its dividend and buyback. It can either repatriate the funds and pay a huge tax bill, or borrow against those foreign funds. Apple issued $17 billion in debt earlier this year to aggressively buy back shares.

As if a 2.5% annual dividend yield and $60 billion buyback (the largest in corporate history) weren't enough, Icahn has been arguing for more. Recently, Icahn met with Apple CEO Tim Cook and argued for a $150 billion buyback. Apple has not announced anything yet, and I doubt they will in the near term. With interest rates on the rise, I'm not sure Apple wants to take out more debt just to buy back shares. They are already buying back a ton as it is. However, Apple could go the Microsoft (NASDAQ:MSFT) route, announcing a buyback with no expiration date. If Apple did announce an extension or raise to its buyback, I would hope that they don't put a specific date on it, at least initially. Theoretically, they could announce a $500 billion buyback program, with no expiration date, and buy back stock as they please. But I think it would be unwise if they announced a $150 billion buyback with a short term expiration date (next 5 years or so).

This is definitely one Icahn investment that investors should be in. In addition to the dividend and buyback, you have one of the best performing companies on the planet. Apple's blowout iPhone weekend shows that the company's products are still in great demand, and that will only help profitability and future cash flows. Apple is set up for a tremendous year, and this stock has a good deal of upside.

Netflix (NASDAQ:NFLX):

This is the one Icahn investment that investors might want to start worrying about. Since Icahn has made a ton of money on this one, he says it is no longer becoming a no-brainer to hold. Netflix shares hit another new high on Wednesday, topping $330 at the close. It's been a tremendous rally for a company that traded in the low $50s late last year. If Icahn were to start taking profits, Netflix would surely drop. Remember, Carl probably would have sold already if not for his son threatening to leave. I've maintained my view that Netflix shares hold at least a 10%-15% "Icahn premium", which obviously has gotten bigger as shares have continued to soar. If Icahn were to announce his exit, Netflix shares could see $275 rather quickly in my opinion.

Despite Netflix shares dropping $20 in the two days after its Q2 report, the stock is up almost 40% from its post-earnings lows. Whether that rally holds will depend on two important items, Icahn's position and the Q3 report, to be released on October 21st. Netflix will need to show it is still increasing subscribers at a meaningful rate and prove that it can manage some level of profitability from the streaming business. Netflix's profit machine DVD business will continue to atrophy, and one must wonder how much longer they will stick with it. Netflix will also need to discuss how its latest international foray into The Netherlands is working. It also would be nice to see some balance sheet improvement, but it is more likely that their liabilities will continue to pile up, including the $4 billion in off-balance sheet liabilities they had at the end of Q2.

In the end, Netflix is a bit of a shaky investment at $330. If Icahn exits his position, this stock will drop in a heartbeat. The company also needs to have a spectacular earnings report, because the stock has rallied tremendously since the last report, which was not great. This stock is priced for perfection, and anything but that at the quarterly report will mean trouble.

Nuance Communications (NASDAQ:NUAN):

Nuance is a name that Icahn has even more influence over, as he has an almost 17% stake in the technology name. Icahn has been arguing that Apple buy Nuance, but I'm sure that any buyer of Nuance would meet Icahn's objective to make money. Nuance has a market cap of almost $6 billion, which probably means Apple is not interested. Apple has not been known to make large acquisitions, so it would seem that Nuance would not fit in with that strategy. Nuance is the company that helps Apple power Siri, so there is a benefit to Apple making this purchase. Apple would probably turn around and sell off Nuance's healthcare and enterprise operations.

Nuance is not a tremendous growth company at this point, with current and next quarter revenues basically expected to be flat. The company is only expected to grow revenues by 6.2% in the fiscal year ending September 2014, and earnings are projected to rebound a bit after this fiscal year's sharp decline. The average analyst price target implies 12.7% upside from Wednesday's growth, which partially reflects the idea of a buyout. In terms of my opinion, I would put Nuance as a stronger buy than Netflix, but not as strong as Apple.

Herbalife (NYSE:HLF):

The battle over Herbalife, which some call a pyramid scheme, has been a very public one. Carl Icahn has taken the long side of this one, battling another titan, Bill Ackman. Icahn is certainly winning this one, with Herbalife shares tripling from their 52-week low just above $24. Other large investors have joined Icahn's side, pushing shares higher.

Ackman has been wrong so far on this one, and this stock still has the potential to soar even more. At the latest update, approximately 36% of Herbalife's float was short, meaning a massive short squeeze is possible on good news. Icahn has been arguing that Herbalife could see "the mother of all short squeezes", which has forced Ackman to change his position strategy. It will be interesting to see how his change to puts will affect both Icahn's thought process as well as the stock. A potential buyback could be the catalyst for another pop. After such a large rally, I'm a bit cautious on this name, especially considering the constant battle to investigate this name for shady business practices. At this point, I think there are many other opportunities for investors out there, and I would let the billionaires fight this one out on their own.

Hain Celestial (NASDAQ:HAIN):

This is a name that Icahn used to own, as he exited his position a couple of weeks ago. While you would think a non-Icahn holding wouldn't fit in this article, there's the potential for a trade here. If Icahn is selling this name, should you be too? Icahn had a more than 15% stake in the organic food and personal care product name as of June 30th, but he has sold out since. That may not be a bad thing for Icahn, who started this stake in 2010 when the stock was in the low $20s. It's now in the upper $70s.

With Icahn exiting his position and shares close to their 52-week highs, there are some calling for significant downside. SA Pro Contributor William Lucas argues that weak organic growth along with a host of other issues makes this name a tremendous short opportunity. Lucas argues that 50% downside is possible, which goes against the analyst community's belief that this name goes 10% higher from here. Hain Celestial may be a good example of a name investors should avoid, or possibly short, now that Carl Icahn has sold his position.

Final thoughts:

Today, I discussed four Carl Icahn holdings and one he recently exited. While I believe that a bigger buyback for Apple at this point is not the best idea, investors need to be in Apple just like Icahn is. Carl is sitting on a mountain of profits in Netflix, and one must wonder if he will soon exit the streaming giant. If he does, watch out below. Nuance Communications is a name that could be bought out, although probably not by Apple. Herbalife has been one of the biggest battle stocks during 2013, and while Icahn has been right so far, investors are probably best on the sidelines. Icahn recently sold out of Hain Celestial, which could have marked a top and provided an interesting short opportunity for investors.

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

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.