Riding Carl Icahn's Wake

 | Apr 15, 2013 | 10:00 AM EDT  | Comments
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One of my favorite investors of all time is Carl Icahn. He is never shy to voice his opinions, he does not have to appease investors (as he invests his own money) and he has the stubbornness of a Rottweiler. Through his consistent agitation, he has unlocked tens of billions of dollars of shareholder value over the decades.

This cantankerous shareholder activist has not slowed down with age and he has been particularly active recently. So far this year, he has made a huge score this year with his stake in Netflix (NFLX), had an infamous throw down with Bill Ackman about Herbalife (HLF) on CNBC and has inserted himself squarely in the middle of the Dell (DELL) buyout saga as well.

I have been fortunate enough to have made several substantial gains over the years in stocks that Icahn has chosen to focus on. Currently, I am holding two positions in which the famed investor also has a significant stake; both are cheap in their own right and should also benefit from the activism of this renowned investor advocate.

Nuance Communications (NUAN) Icahn recently announced a 9% "passive" stake in this voice recognition software maker whose products are used by Apple (AAPL) in its mobile product line. The company has hired Goldman Sachs to explore strategic alternatives. Some are speculating that there will be a push to have the company divest or sell its slow moving document imaging operations, which could yield about $400 million that could be used to pay down debt. This would also allow the company to concentrate on its faster growing core voice recognition products. The company recently got into the mobile advertising market with the launch of Voice Ads, a platform that allows smartphone/tablet users to interact with ads via voice commands.

Given that Nuance has a market capitalization of around $8 billion (including debt) and has patented technology in myriad mobile products, this company could wind up as an acquisition target at some point in the future. Revenues are on track to grow at just under a 20% compound annual growth rate (CAGR) over the next two years and the stock has a five-year projected price-to-earnings growth (PEG) below 1 (.72). Trading at less than 11x 2014's projected earnings, the stock is also cheap.

Transocean (RIG): The noted investor is getting on the nerves of the board of this large offshore driller. The activist has amassed over 20 million shares in the company, which gives him a little over 5% of the stock. He also has been highly critical of some of the company's past acquisitions which occurred near the height of the market in 2007 and destroyed shareholder value. The company has recently announced a $2.75 a share dividend payout which puts the stock's yield past 5%. However, Icahn continues to agitate for a $4 a share annual payout and has put forth some nominees he would like to see on the board as well.

Transocean has been embroiled in two major litigations about offshore spills in the last few years. Luckily, the aftermath of 2010 oil spill in the Gulf of Mexico should be concluded within a year and the impacts around a smaller spill off the coast of Brazil has mostly been resolved already. The stock sells at less than 9x 2014's projected earnings and has a minuscule five year projected PEG (.41).

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