Carl Icahn’s Favorite Setup

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Frank Zorrilla has an interesting piece on Carl Icahn’s position trade in Netflix:

Carl Ichan showed the world how he made over $2.1 billion dollars on a $321 million dollar investment.   Carl bought $NFLX in late 2012 when the stock was in a downtrend, near its 52 week low, he sold it today as it traded at all time highs.  Buying stocks near lows and in downtrends goes against what every trading book and trading guru advises you to do.  Carl made over 1000% doing the exact opposite.

While it is absolutely true that there are various ways to extract money from the market, you have to take into account the little details to gain a better understanding of Icahn’s approach:

First of all, the mere size of Icahn’s portfolio simply limits his options. It is hard to put $300 million to work in a stock that has just broken out to new all-time highs. You almost need the liquidity that corrections and forced liquidations bring in order to build a large position at favorable price.

Carl Icahn sold half  of his position in Netflix in October 2013, when it was trading at $315 or 55% below its current level. His gain at the time – over 400% in 14 months – Netflix was trading near $58 in late 2012, when he started to accumulate it. Icahn went from owning 9.4% of Netflix to 4.5%. Here’s what he tweeted at the time: “Sold block of NFLX today. Wish to thank Reed Hastings, Ted Sarandos, NFLX team, and last but not least Kevin Spacey,”.

At that time, Netflix reported record quarterly results and it gapped to new all-time highs. Carl used the liquidity that a new all-time high provided and sold some of his shares at a favorable price. Remember, when you have a large position, it makes a lot of sense to take partial profits on strength. Also, one of the ways to stay longer with a trend is to take partial profits along the way. No one knows how long a trend will continue or how far it will get, but it is a lot easier to continue to ride a trend by taking partial profits along the way, especially when you trade with a size. Here’s Carl on the subject:

“As a hardened veteran of seven bear markets I have learned that when you are lucky and/or smart enough to have made a total return of 457 percent in only 14 months it is time to take some of the chips off the table.”

Basically, one of the major reasons Icahn sold was because his Netflix position became too big as a % of his portfolio.

For the record, his son Brett Icahn did not agree with the early sale and at the time said that Netflix continues to be significantly undervalued. Nathan Vardi has the details on the story:

Brett Icahn and Schechter wanted to hold onto all of their Netflix shares and not cut back on the position, but Icahn overruled them. Instead, in an unusual arrangement Icahn agreed to increase the Sargon funds under management if Netlix’s stock kept rising so that the Sargon portfolio would capture those Netflix gains. Icahn committed that the sold Netflix shares would be deemed to remain in the Sargon portfolio on a notional basis for the purposes of calculating the market value of the portfolio and be reflected in the performance fee of Brett Icahn and Schechter.