He has many labels, Corporate Raider, Activist Investor, or The Most Dangerous Man on Wall Street. . We are, of course, talking about the infamous Carl Icahn and his firm Icahn Enterprise (IEP). Six months ago, Hindenburg, an independent investment research firm, blew a hole in the wall of Icahn’s investing fortress, arming their cannons with heavy accusations and controversy. However, Icahn is the last to shy away from a battle, with an original Napoleon painting hanging in his office entrance.
Now let’s set the stage for the fight that ensued, Hindenburg Research, is infamous for it short positions. Short-selling is a type of investment, where the investor profits as the share value decreases. Hindenburg targets companies that are perceived to be significantly overvalued, citing a catalyst that will lower the valuation. In the past, they have gone after Adani, a very large Indian conglomerate, attacking its valuation from a very aggressive position. Hindenburg’s report led Adani to lose 100 billion dollars from share price.
With their guns pointed at IEP, they have caused many of IEP’s shared holders to waver the firms’ valuation. IEP was incorporated by Carl Icahn in 1987, since then the holding company has followed Icahn in his rise to infamy, especially as he still owns 85% of the company. Carl Icahn’s exploits include his 1989 takeover of Texaco, which culminated in a 2 billion dollar sale of shares. This is still the largest sale ever made on the New York Stock Exchange. Anyway, the point is that Icahn is no joke, and he was known as The Most Dangerous Man on Wall Street for a reason.
Anyway, the point is that Icahn is no joke, and he was known as The Most Dangerous Man on Wall Street for a reason.
With the stage set, let’s review the accusations that brought Icahn enterprise to their current share price. Hindenburg has accused IEP of explicitly writing up the value of their holdings by an average of 22%. Additionally, the report claimed that Icahn is running a Ponzi-like operation and that IEP would eventually remove dividends altogether. The assumption supporting this accusation is that Carl Icahn frequently sells off small portions of his shares to pay off dividends. With such heavy allegations, coupled with Hindenburg’s strong track record, it may seem absurd to disagree with the firm’s findings. However, in examining the evidence, their claims are more disputable than one might expect.
At the time of this article’s writing, IEP is trading at $17.66 with a yearly dividend of $4.00. This is an interesting data point, because before IEP tanked, its annual dividend yield was 15% per share. Now, however, the annual dividend yield is 23%. Indicating that if IEP can beat the allegations, there is still good reason to invest. Currently, the number of shares that are short on IEP has decreased by 160,000 shares, 3% of the previous short volume. Additionally, out of the shares that are not owned by Carl Icahn, 8% are short. Typically, a percentage below 10% is reflective of positive shareholder sentiment. As such, with a high dividend yield and decreasing short positions, IEP’s share price may begin to slowly climb up. But there’s more than just the question of short volume and dividend yield, many are asking if these claims by Hindenburg have any counterarguments.
To begin, it is important to acknowledge that Hindenburg Resereach uses their own capital when shorting the respective companies in these reports. This means that it is in their best interest to make their reports as scathing as possible. This claim has caught the attention of the US Department of Justice, who are currently investigating Hindenburg for illegally lowering share prices using their reports. So far, federal prosecutors have seized hardware, trading records and private communications as the investigation continues. With this information in mind, we can consider the motivations and flaws behind Hindenburg’s two biggest accusations against IEP: explicit over valuation and ponzi-like sales of shares.
It is important to acknowledge that Hindenburg Research uses their own capital when shorting the respective companies in these reports
As mentioned earlier, Hindenburg accused IEP of overvaluing their holdings by an average of 22%, however, this number was drawn only based on IEP’s public portfolio, which accounts for less than half of Icahn’s holdings. The Hindenburg report did not analyze the valuation of IEP’s private holdings. This, at a minimum, makes the report misleading. Additionally, as an activist investor, Icahn’s road to returns is often one that is long and arduous. Part of his strategy is to find companies that are not running well and use his experience and knowledge to strategically increase returns before exiting with a profit for his investors. Naturally, some of these restructurings do not lead to immediate returns and financial performance. This is part of the reason IEP offers dividends, as a way to subsidize the volatility in share price that comes with activist investing before the portfolio companies generate a return. Furthermore, the accusations of a ponzi-scheme are far-reaching, when you consider that Icahn takes his dividends as equity rather than cash. In a ponzi-scheme, the mastermind has the ultimate goal of exiting and taking cash profits, which was the exact opposite of what Icahn was doing when his stock was sky-high.
As such, IEP has some flaws, but Hindenburg may have overexploited them for personal gain, leaving Icahn enterprise with a devastating decrease in share value. Due to such a low valuation, the stock yields a higher than before annual dividend yield. Ultimately, the scathing report of Hindenburg may not hold as much weight as one would first assume, leaving room for investors to consider if IEP is particularly undervalued at this point or will Hindenburg keep drilling them to the ground.
