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Why Carl Icahn is Pouring a Fortune into These Stocks

February 17, 2011 | About:
Street Authority

Street Authority

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Want a great stock tip? You might want to take one from Carl Icahn, since he seems to know what he's doing. The 75-year-old investing legend earned his fortune the old-fashioned way: through leveraged buyouts and private equity deals. Since 1978, Icahn has been taking on majority stakes in companies, unlocking their full value (usually with management shakeups), selling them for a nice gain and then rolling those profits into the next and bigger deal.

Considering he's parlayed very little into an $11 billion portfolio in a little more than three decades, it might be worth poaching one of his picks.

And yes, it's a perfectly legal suggestion. In fact, the document where you can get such a tip is actually filed with the Securities & Exchange Commission by Icahn's investment fund, Icahn Capital, and is available for anyone to peruse.

It wouldn't take long to read through it either, since the largely-self-made billionaire prefers a Buffett-like concentrated approach where larger stakes in only a small number of companies are held. Indeed, 20% of his portfolio is made up of one company -- Motorola -- and he bought even more last quarter.

Motorola

Just to clarify, Icahn actually owned the pre-breakup Motorola shares as of the end of December. They split into Motorola Solutions Inc. (MSI) and Motorola Mobility Holdings (MMI), but that move didn't come until after the "as of" date for the SEC-filed document. Regardless, he still owns more than $2 billion worth of the Motorola family of stocks and actually increased his Motorola stake by 7.0% before the year ended. All told, Icahn Capital now owns about 38 million shares of Motorola Solutions, or about $1.5 billion worth, and owns more than 33 million shares of Motorola Mobility, which is just shy of $1 billion worth.

And just for the record, Icahn was a very supportive fan of the split.

Though that kind of concentration isn't advisable for most investors, but Carl Icahn isn't most investors. This large stake is apt to stem from his insight that the retail/consumer mobile phone side of the business was getting in the way of the professional/enterprise-level mobile business, especially now that the smartphone race is heating up.

So far, Motorola's Droid phone, powered by Google's (GOOG) Android smartphone operating system, has at least kept Apple (AAPL) and its iPhone honest. This is a tentative time though and one misstep at this juncture in the smartphone industry's expansion could put and keep a manufacturer at the end of the line. By letting each arm focus on doing what it does best, both Motorola entities have a better shot at success.

Chesapeake Energy Corp. (CHK)

Chesapeake was another of Ican's major accumulations in the fourth quarter. In fact, the position was the biggest relative change within Icahn's portfolio, as the position size ramped up by 58%.

It's another textbook case of unlocking value. Chesapeake is less profitable and valued for less than its natural gas peers and is saddled with more debt than most of its competitors, too. The return on capital for Chesapeake is a mere 3.8% and the debt/capital ratio is a hefty 43% -- both metrics are at the extreme (weak) end of the scale for this group.

Icahn is expected to do what nobody else at the company seems willing to do -- cut costs, reduce debt and whip it into shape.

As of the end of last quarter, the 5 million shares of Chesapeake Icahn added brings his total up to 21 million, or $630 million worth of the $20 billion company.

Enzon Pharmaceuticals Inc. (ENZN)

Last but not least, Enzon Pharmaceuticals became even more interesting to Carl Icahn last quarter. It's not even a top-10 holding for Icahn Capital, but a significant buy-in was made all the same. Icahn more than doubled his stake in the biopharmaceutical company, adding 1.9 million shares to bring his total position up to 4.7 million shares. That's only $52 million worth to Icahn, but he still owns more than 10% of the whole company as a result.

The interest in Enzon isn't a total shocker. Icahn has an affinity for health care (as well as tech) stocks. Enzon isn't apt to be viewed as a fixer-upper like Chesapeake Energy is, though. Rather, there's a good chance Icahn is trying to tweak this company into becoming a buyout candidate.

Enzon's got the right idea. It collects royalty payments for some of its drug technologies, and it's developing cancer therapies that show real promise. It's even been reported that a handful of new licensees are lined up for the company. But Enzon just can't get into the black on its own, so Icahn may be able to get a deal done that transcends the current losing structure.

Action to Take --> While taking a cue from a proven stock picker has its clear advantages, it still comes with a downside... you're always going to be behind the guru on the buy side as well as the sell side. It's a worthy sacrifice in most cases though, and if you're a nimble investor, it won't matter too much.

Of the three major purchases he made last quarter, both Motorola stocks look like the wisest plays right now. Chesapeake may offer the biggest turnaround potential, but that's a project that could take a while to bear fruit. The same goes for Enzon. Motorola Solutions and Motorola Mobility Holdings, however, are solid straightforward picks in an industry that's very transparent.

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-- James Brumley

Disclosure: Neither James Brumley nor StreetAuthority, LLC hold positions in any securities mentioned in this article.


This article originally appeared on StreetAuthority

Author: James Brumley

Editor: You can click on Carl Icahn here, to access his recent trades.

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