Broad shoulders… puffed-out chest… and completely in charge of the situation.
Most of us have imagined ourselves in the shoes of the “tough guy” at one time or another.
But in investing, it’s a different story…
That’s because tough-guy investing is a road to ruin for most of us.
It takes serious monetary muscle to pull off the kind of investing that really pushes a company around. And most investors simply don’t have access to that kind of capital.
What’s more, candidates for tough-guy activism often have serious problems.
These companies might have complex liabilities or weak balance sheets. Or they might involve what one real-life investment tough guy calls “corporate malfeasance and weak corporate governance.”
Ultimately, most of us will never become an investment tough guy. But fortunately, thanks to the stock market, we can become this real-life investment tough guy’s sidekick.
Let me explain…
You might’ve heard Carl Icahn’s name before…
In short, Icahn is a famous activist shareholder. He’s willing to roll up his sleeves. He likes to push management to make beneficial changes. He’s a real-life investment tough guy.
His flagship business is Icahn Enterprises (IEP).
It’s a publicly traded limited partnership. Icahn owns between 85% and 90% of the units. The rest trade on the Nasdaq exchange. Investors like us can buy and sell them like any stock.
To understand Icahn Enterprises, it’s best to compare it with another company that many investors know. I’m talking about Warren Buffett’s famous Berkshire Hathaway (BRK-B).
Icahn Enterprises and Berkshire Hathaway both have two elements…
First, each company contains a collection of wholly owned operating businesses.
Berkshire Hathaway is known for its ownership of car-insurance business Geico, railroad BNSF Railway, and battery maker Duracell. It also owns many other smaller businesses in a wide variety of fields.
Icahn Enterprises also has operating subsidiaries. These businesses include auto-parts retailer Pep Boys, petroleum refiner and fertilizer maker CVR Energy, bed-and-bath décor producer WestPoint Home, and more.
The second element of both Berkshire Hathaway and Icahn Enterprises is more important to us. In short, each company also has its own investment portfolio.
That’s where the two companies diverge…
You see, with Berkshire Hathaway, Buffett invests in great businesses with great management teams. Two examples are Apple (AAPL) and Coca Cola (KO).
But on the other hand, Icahn Enterprises tackles underachievers.
Then, after investing in these underachievers, Icahn tries to unlock value. He may pursue “tender offers, proxy contests, and demands for management accountability.”
In other words, as I said… Icahn is a real-life investment tough guy.
And Icahn’s willingness to be an investment tough guy has worked well. Here are some noteworthy gains on investments he has sold in recent years…
- In 2017, a 33% gain on an investment in American Railcar Leasing
- In 2018, gains of 4.7%, 34%, and 19% on investments in Federal-Mogul, Tropicana, and American Railcar Industries, respectively
- In 2019, a 31% gain on Ferrous Resources
- In 2021, a 31% gain on PSC Metals
- And most recently, he won big with an investment in Twitter
Now, most of us don’t have the investing capital to make deals like this on our own. But as I said, since Icahn Enterprises trades on the open market… we can be his sidekick.
Through the partnership, these investors wind up participating in Icahn’s big winners. And the company funds its dividend using its gains (along with operating profits).
Icahn Enterprises has paid out $2 per unit every quarter for the past four years. At the stock’s current level, that works out to an incredible yield of roughly 16%.
That’s an eye-opener. As regular readers know, I would usually call that a “sucker yield.”
Double-digit yields like that typically signal troubled companies. The companies may cut or omit future dividends. So the supposed mega-yield often turns out to be a pipe dream.
However, as an investment tough guy, Icahn plays by a different set of rules…
His spectacular track record proves that he’s not a sucker. For decades, he has generated incredible wealth for himself – and his investment sidekicks through Icahn Enterprises…
Icahn Enterprises’ stock generated a 15% annualized total return (capital gains plus dividends) since the beginning of 2000.
That dwarfed the 6.7% annualized total return of the SPDR S&P 500 Fund (SPY) over that span. And it also trounced the 10.4% annualized total return of Buffett’s Berkshire Hathaway.
Put simply, Icahn is living the dream as an investment tough guy.
Most investors like us could never follow in his footsteps. We don’t have enough capital.
But fortunately, Icahn still welcomes sidekicks.
Good investing,
Marc Gerstein
