Published: October 8, 2010

An extremely valuable investment strategy is to keep tabs on what the major players on Wall Street are doing with their money. Warren Buffett, George Soros, Bill Gross, Mario Gabelli and Jeremy Grantham quickly come to mind -- especially considering they are more than willing to put their own money on the line. So does Carl Icahn.

Icahn is an especially interesting subject, given his reputation as a corporate raider and activist shareholder willing to go head-to-head with management teams he deems inept or unable to maximize shareholder value. His moves have paid off -- Icahn is currently worth an estimated $10.5 billion dollars. Past moves that have paid off big include the sale of a handful of casinos in Nevada just as the market was crumbling in 2007. Reports put his proceeds at $1.3 billion -- $1 billion more than his purchase price. He has also been active in healthcare and succeeded in pushing MedImmune to be acquired by AstraZeneca (NYSE: AZN).

The current market environment and downturn, courtesy of the credit crisis, could prove ideal for Icahn to put his skill set to good use, given there are now many companies trading at depressed values. He just reentered Las Vegas by acquiring the bankrupt Fontainebleau casino and plans to sit on the unfinished property until market conditions improve. He also led a group of lenders that acquired the Tropicana Resort in Atlantic City, another bankrupt casino.

Icahn's self-professed strategy is to "acquire securities in companies that trade at a discount to inherent value as determined by various metrics including replacement cost, break-up value, cash flow and earnings power and liquidation value." There is no better way than to explain it in this matter, though a few specific examples are needed to illustrate how the strategy is carried out.

Icahn's primary investment vehicle these days is a publicly-traded company aptly called Icahn Enterprises, L.P. (NYSE: IEP). Icahn himself owns about 90% of Icahn Enterprises, which is a complicated entity, but basically consists of five primary divisions that are organized as a limited partnership.

In terms of priority on its impact on the company, the investment management arm is the main driver of the company's profits. This is because Icahn Enterprises receives fees from the many hedge funds that Carl Icahn runs. Fees consist of flat management fees of up to 2.5% of assets under management (AUM), plus incentive fees that can be up to 25% of net profits, and other special profit fees that can be earned based off of certain performance criteria.

Last year, Icahn Enterprises reported overall net income of $233 million, and the investment division contributed $469 million to the bottom line. The division ended the second quarter of this year with $5.8 billion in AUM. It's important to note that Icahn carries out many of his activist investments through his hedge funds. Recent companies he has targeted and invested in include Motorola (NYSE: MOT), Blockbuster, and Lions Gate Entertainment (NYSE: LGF).

In other words, the other divisions, which consist of an automotive, metals, real estate and home fashion segments, combined to report a loss. To give you an idea of these units, the automotive division consists of a majority interest in Federal-Mogul, an automotive parts supplier that fell on hard times and went bankrupt in 2001. It emerged from bankruptcy around 2007, and Icahn Enterprises acquired more than 75% of the company shortly afterward.

The metals group consists of an interest in PSC Metals. The firm recycles scrap metal and other metals such as aluminum, copper and brass. The real estate group rents out properties it owns and includes retail and commercial assets. Finally, the home fashion unit consists of WestPoint International, which produces bed and bath home fashion items. Earlier this year, Icahn Enterprises also acquired part of a railcar and food packaging firm stake that Mr. Icahn held.

Action to Take ---> It should be painfully obvious at this point that Icahn Enterprises is a complicated company with many moving parts. Trying to get to the most accurate valuation possible of all of the pieces would be the best course of action for interested investors. We're on our own on this front, as no analysts currently cover the company. This speaks to the company's unique circumstances.

Basically, this holding is Icahn's personal investment vehicle. Icahn Enterprises' investment in the underlying hedge funds most recently totaled $2.1 billion. Again, about 90% of this capital is Carhl Icahn's personally -- so if you buy the shares, you're literally investing right alongside a Wall Street legend. As such, growth in the stock will mirror the success of his ability to grow his net worth by investing in undervalued companies and assets through his numerous investment vehicles. There is a slight payout as well -- through a current dividend yield of about 2.8%.

At a minimum, smart investors should track Icahn's moves through press and financial releases from Icahn Enterprises. Many of his moves are also covered extensively by the media, and you can also follow the active stakes Icahn takes through his hedge funds as well. Others may want to ante up for the common stock, with the understanding that Icahn has no qualms about using leverage and taking an extremely long-term outlook to buying interests in underperforming and even distressed securities.

-- Ryan Fuhrmann
Contributor
StreetAuthority

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