Carl Icahn's Top Undervalued Q3 Picks

by: GuruFundPicks

Carl Icahn is a well-known American financier, corporate raider and ‘activist’ hedge fund manager. His eponymous fund typically takes large stakes in distressed public corporations, and then uses his influence resulting from the ownership to affect change at these companies, eventually, in many cases, selling them for a ‘tidy’ profit. In the past, he has taken substantial or controlling positions in RJR Nabisco, TWA, Texaco, Philips Petroleum, Western Union, Gulf & Western, Viacom, Uniroyal, Dan River, Marshall Field, American Can, USX, Marvel Comics, Revlon, Imclone, Federal-Mogul, Fairmont Hotels, Blockbuster, Kerr-McGee, Time Warner and Motorola.

Per the latest SEC 13-F filing for the September 2011 quarter, his eponymous fund held a concentrated portfolio of 21 equity positions in a $12.1 billion portfolio. The fund is overweight technology (28%), services (24%) utilities (14%) and consumer (22%) sectors, and it is underweight energy (0%), basic materials (1%) and financial (0%) sectors. Almost half of the assets in the fund are deployed in mid-caps, a fifth in large-caps and small-caps account for the remaining third of its assets. Furthermore, their portfolio turnover is almost 100%, implying a holding period in the range of one year.

Based on a review of available SEC 13-F filings, we determined that Carl Icahn is bullish on the following undervalued stocks (see Table):

Forest Labs Inc. (NYSE:FRX): FRX develops, manufactures and sells both branded and generic forms of ethical drug products which require a physician’s prescription, as well as non-prescription pharmaceutical products that are sold over-the-counter [OTC]. Its principal products include: Lexapro for major depressive disorder, Namenda for Alzheimer’s disease, Bystolic for hypertension, Savella for fibromyalgia and Teflaro for community-acquired bacterial pneumonia. Icahn added $182 million to its $584 million prior quarter position. FRX is undervalued, trading at less than 7 P/E on a trailing-twelve-month [TTM] basis, at 1.5 P/B, and at 6.5 P/CF compared to the averages of 11.9, 3.0 and 10.0 respectively for its peers among drug manufacturers. Besides Icahn, other major funds that accumulated FRX shares in Q3 include Morgan Stanley, adding 4.3 million shares to its 10.2 million share prior quarter position, and Schroeder Investment Management, adding a new 1.6 million share position in FRX.

Oshkosh Corp. (NYSE:OSK): OSK manufactures specialty, commercial, fire, emergency and military trucks, truck bodies and crane components. Icahn added $128 million in Q3 to its $52 million prior quarter position, more than tripling the position. OSK is undervalued, trading at less than 7 P/E on a TTM basis, at 1.2 P/B, and at 4.9 P/CF compared to the averages of 12.8, 1.3 and 5.8 respectively for its peers in the auto and truck manufacturing industry. Besides Icahn, other major funds that accumulated OSK shares in Q3 include: Thornburg Investment Management that added a new 4.5 million share position, Franklin Resources Inc. that added a new 4.4 million share position and Fidelity Investments that added 1.5 million shares to their 1.3 million share prior position in OSK.

Commercial Metals Company (NYSE:CMC): CMC is engaged in the recycling, manufacturing, fabricating and distributing steel and metal products, and related materials and services for the construction, manufacturing and fabrication industries in the U.S. and internationally. Icahn added $85 million in Q3 to its $62 million prior quarter position, more than doubling the position. CMC is undervalued, trading at a forward 7 P/E, and at 0.2 price-to-sales [PSR] ratio, compared to the averages of 11.4 and 0.4 respectively for its peers in the steel manufacturing industry. However, please note that it trades at a more premium 1.3 P/B and 52 P/CF compared to the 0.9 and 6.2 averages in the industry. Besides Icahn, Franklin Resources also accumulated CMC shares in Q3, adding 1.4 million shares to its 1.1 million share prior quarter position in the company.

Navistar International Corp. (NYSE:NAV): NAV is a manufacturer of commercial and military trucks, buses, diesel engines and recreational vehicles. They serve the government, construction, energy and commercial transportation markets. Icahn added a new $68 million position in Q3. NAV is undervalued, trading at a forward 6 P/E, at 0.2 PSR and at 2.8 P/CF, compared to the averages of 12.0, 0.5 and 5.8 respectively for its peers in the auto and truck manufacturing industry. Besides Icahn, UBS AG also accumulated NAV shares in Q3, adding a new 1.7 million share position in the company.

Besides the undervalued stocks mentioned above, Carl Icahn based on his Q3 buying activity and his holding large positions at the end of Q3 (see Table) is also bullish on oil and gas exploration, production and transmission company El Paso Corp. (EP), in which it added a new $1.64 billion position (its largest buy in Q3); healthcare-related internet content provider Webmd Health Corp. (NASDAQ:WBMD), in which it added a new $70 million position; and Motorola Solutions Inc. (NYSE:MSI) and Motorola Mobility Holdings (NYSE:MMI), in which it holds the largest and second largest positions at the end of Q3 at $1.76 billion and $1.30 billion respectively.

Select stocks that Carl Icahn is bearish on (see Table) include film and TV entertainment producers and distributor Lions Gate Entertainment (LGF), in which it dropped completely its $394 million prior quarter position; and cleaning products and water filtration systems manufacturer Clorox Co. (NYSE:CLX), in which it cut $30 million from its $810 million prior quarter position.


Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and The information and data is believed to be accurate, but no guarantees or representations are made.

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

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