1/22/16
At Billionaire’s Portfolio we study the buying patterns of the world’s greatest billionaire investors and hedge funds. So when two of greatest billionaire investors in the world, Carl Icahn and Warren Buffett, are adding more to their large, beaten down stakes in energy companies, we pay close attention.
We know two things about Buffett and Icahn: 1) they have made billions throughout their careers buying when everyone else is selling, and 2) they have a knack for picking the winners, the stocks and sectors, and marking the bottom when they enter.
Their respective records are especially remarkable in times when widespread fear and doubt is in the air. For example, Icahn marked the bottom in technology stocks in the fall of 2012 with his 10% position in Netflix. He made $2 billion in profits on the trade, a nearly 1,000% return. Buffett marked the bottom in bank stocks in the fall of 2011 when he initiated a $5 billion position in Bank of America. That investment has almost tripled in price since, producing nearly $10 billion in open profits for Buffett.
Now, it’s typical in market environments like this to hear from experts that warn against picking tops and bottoms. But contrary to the Wall Street adages against market timing, the two best investors of all-time have amassed two of the largest personal fortunes in the world by (as Buffett says) “being greedy while others are fearful.” And they are using the new lows in oil and energy markets to add more to their stakes. Historically, that tends to be a profitable signal. There is a Harvard study that shows when hedge funds “double down” on losing positions, on average those tend to be their biggest winners.
Let’s look at the investments from this billionaire duo where they have been adding to their losers:
1) Phillips 66 (PSX) – Buffett revealed last September he had taken a $4.5 billon position in the energy stock Phillips 66. This is a typical Buffett stock. It sells for just 9 times earnings, a huge discount to the S&P 500’s P/E of 21, and the stock pays nearly 3% in a dividend. Furthermore, the company has a pristine balance sheet, with very little debt – a classic Buffett stock, cheap and safe. Buffett has added another $700 million to this stock just in the past two weeks. He’s the largest shareholder.
2) Chesapeake Energy (CHK) – Carl Icahn owns doubled his stake last spring when he bought 6.6 million shares of CHK for about $14. Icahn now owns 11% of Chesapeake. If the stock returns to the price where Icahn doubled down it would represent an almost 300% return for today’s levels. With the sharp fall in the stock price this past week, I wouldn’t be surprised if we find in the coming days that Icahn added more into the recent slide.
3) Cheniere Energy (LNG) – Carl Icahn also initiated a $1.3 billion position in energy stock LNG in August of last year, taking an 8% ownership in the company. Cheniere is on track to become the first U.S. company able to export liquefied natural gas. This makes LNG a classic “wide moat” (no competition) stock. Icahn has already secured two board seats on Cheniere’s board. Icahn’s “board seat effect” has proven to be a huge predictor of success for the legendary activist. According to an essay Icahn penned last year, when he gets a board seat in a company, his stock returns averages 27.5%. Since his initial stake in August, Icahn has added to his stake several times into the end of the year. He now owns 13.8% of LNG — the largest shareholder.
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