Carl Icahn is one of the most famous investors in history. In the 1980s and 1990s, he became known as a corporate raider who bought up large stakes in companies to effect change. Over the decades he has amassed a fortune worth billions of dollars.
Icahn has never shied away from making big bets. Currently, almost all of his wealth – about $6.3 billion – is invested in a single stock. The stock price is currently at historic lows, potentially making this a lucrative opportunity to bet alongside a legendary billionaire investor.
Billionaire Carl Icahn is betting on himself
It should come as no surprise that Carl Icahn invests the majority of his money in a company named after him: Icahn Enterprises (NASDAQ:IEP). Founded in 1987, Carl Icahn has long used Icahn Enterprises as his primary investment vehicle. He currently owns more than 80% of the company, a stake worth around $6.3 billion. Essentially, Carl Icahn has full control of Icahn Enterprises, and the company’s stock price is a direct result of his long-term decision-making ability.
Icahn Enterprises is a conglomerate company. This means that it is a collection of different companies, many of which have nothing to do with each other. In the last quarter, the net asset value of these companies was around $4.8 billion. Part of this net asset value consists of various real estate assets as well as a handful of industrial and automotive companies. However, around two thirds of the value is tied to just two things: a stake in CVR Energy, an oil refining company, and a stake in Carl Icahn’s investment funds, which operate separately from the company. Although Carl Icahn has diversified operations somewhat, he is heavily dependent on the performance of CVR Energy and its investment funds.
Carl Icahn is probably aware that Icahn Enterprises has concentrated its operations. These bets seem to represent the two areas in which he is most confident. With a long track record of creating billion-dollar fortunes, investors can immediately bet alongside Carl Icahn simply by purchasing shares of Icahn Enterprises.
A problem that makes little sense
Investing alongside legendary billionaire investors is a sound strategy. Just look up Berkshire Hathaway. Patient investors who trusted Warren Buffett achieved double-digit annual returns for decades. But Icahn Enterprises is not Berkshire Hathaway. Not close. Since 1998, Berkshire Hathaway stock has increased in value by more than 1,000%. Meanwhile, Icahn Enterprises shares have only increased in value by 69%. However, the company has consistently paid high dividends. These dividends close the gap significantly, as Icahn Enterprises delivered a total return of 630% over this period. But there’s still no denying that Berkshire Hathaway has proven to be a superior long-term investment with far lower volatility. And if you had reinvested your Icahn Enterprises dividends back into Icahn Enterprises stock, your total return would have been well under 630%.
So why does Icahn Enterprises stock appear to be trading at a premium to Berkshire Hathaway? Based on the price-to-book ratio – a very simple metric that measures how much the market is willing to pay for a company’s assets – Icahn Enterprises currently trades at 2.3 times book value. Berkshire, meanwhile, trades at just 1.6 times book value. There’s even reason to believe that Berkshire’s price-to-book ratio is inflated, considering the company has repurchased tens of billions of dollars in stock over the years. These buybacks created great value for shareholders, but because of accounting rules, they suppressed the company’s true book value. Meanwhile, Icahn Enterprises quickly issued new shares. Over the past five years, the company’s share count has increased 112%.
It’s hard to justify buying Icahn Enterprises over Berkshire Hathaway, especially given its premium valuation. Looking at Icahn Enterprises’ business portfolio, it’s hard to argue that anything should be valued above book value. The value of the company’s stake in Carl Icahn’s investment funds, for example, rose from $4.2 billion last year to just $3.2 billion today. His stake in CVR Energy, which should be valued near book value because it is a publicly traded asset, has fallen from $2.2 billion to just $2 billion over the same period. The rest of Icahn Enterprises’ assets aren’t faring much better. One of its automobile companies, for example, filed for bankruptcy last summer.
Carl Icahn is betting huge sums of money on Icahn Enterprises, but that’s probably because he has to. The value of the company would likely collapse if he suddenly tried to sell all of his shares. With shares trading at an inexplicable premium to Warren Buffett’s Berkshire Hathaway, investors are probably better off betting on this billionaire than this one.
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
Billionaire Investor Carl Icahn Bets $6.3 Billion on This 1 Stock was originally published by The Motley Fool