By Jeff Bailey
Carl Icahn's publicly-traded investment vehicle, Icahn Enterprises (IEP), had this to say, among other things, last week about Netflix (NFLX), the video company the billionaire investor's firm had purchased a 10% stake in about 14 months earlier: "we believe the company remains significantly undervalued."
That remark, of course, came in a news release in which Icahn disclosed it had sold more than half of its stake for almost $1 billion. Icahn retains a roughly 4.5% stake in Netflix. If the company was, indeed, undervalued in the hours before Icahn made that statement, it became a screaming bargain in the hours after the disclosure, as the market digested the news. (For the record, Icahn sold 2,989,000 shares at prices from $304 to $341, so the firm missed the absolute recent top in Netflix shares but did nicely, just the same.)
The episode is a lesson in the opportunities and dangers of momentum investing, buying stocks with sky-high valuations because they're rising, say, rather than out of belief in the underlying business. At $58 a share, Icahn's cost basis from buying in 14 months ago, the underlying business of Netflix could certainly have been the attraction. Above $300, the stock more resembles a squirrel running into the trees: dogs are compelled to chase it. (We're not calling anyone a dog, by the way.)
As for Netflix, after yesterday's plunge, all us value investors can scrape it up for about 275 times trailing earnings.
David Schechter and Brett Icahn, managers of the Icahn Enterprises fund that holds the Netflix shares, said more fully: "Our cost basis in Netflix is $58 per share. Despite its notable appreciation in just over one year to $323 per share, for the reasons set forth below, we believe the company remains significantly undervalued."
Carl Icahn added:
While I basically agree with David and Brett's assessment above and have often held positions for many years, as a hardened veteran of seven bear markets I have learned that when you are lucky and/or smart enough to have made a total return of 457% in only 14 months it is time to take some of the chips off the table. I want to thank Reed Hastings, Ted Sarandos and the rest of the Netflix team for a job well done. And last but not least, I wish to thank Kevin Spacey.
The old boy's sounding a little giddy, eh?
The Wall Street Journal's Martin Peers wisely pointed out that it's a good thing for Icahn and other Netflix holders that Netflix CEO Reed Hastings ignored the billionaire's advice to seek a buyer for the company.