Taking Stock

By Tony Crowell
By Tony Crowell

The Catalyst King

Stocks sometimes get a catalytic boost from news of a spin-off or of an activist investor buying shares. Like stock splits, there are no immediate changes in the company’s financial status but the prospect of change encourages investors.

General Electric (GE-$25), fifth largest position among my portfolios, recently filed documents with the SEC for an Initial Public Offering (IPO) of part of its consumer credit business. The IPO will be for 20% of this segment, which will be renamed Synchrony Financial. GE will retain the remaining 80%, which will probably be spun-off next year.

This IPO is only a small part of GE’s financial operations, which account for 40% of its overall earnings. GE’s manufacturing businesses, which include aircraft engines and energy infrastructure, are doing quite well, GE Capital has lagged since the financial crisis. Its CEO intends to reduce its segment to 30% of earnings and the spin-off is a signpost for that effort.

GE is valued at 15 times 2014 earnings, low for a company of its capabilities and flushing out its financial segment should increase its perceived valuation. As in most spin-offs, shareholders should plan to hold the shares received for at least a year.

Novo-Nordisk (NVO-$45) holds the number two spot in my portfolios. This Danish-based global leader in diabetes care just completed a 2:1 stock split and continues its strong growth. The company intends a possible spin-off of its Information Technology unit. Like GE’s proposed IPO, the unit is not material alone to its businesses but should provide a nice grace note for its shareholders.

The entrance of Carl Icahn among a company’s shareholders often spurs its stock price. Last August, he announced his interest in Apple (AAPL-$534), my number one position, promptly pushing its price up 5%. He then targeted Bay (EBAY-$57) and is currently prodding it for an IPO of part of PayPal. eBay (my  number twenty) is no longer just an online garage sale and is a strong buy on organic earnings growth alone.

Mr. Icahn feels that the greatest weakness of American business is, “with some exceptions,” the mediocrity of its management. His home page begins, “Some people get rich studying artificial intelligence. Me, I make money studying natural stupidity.”

Transocean (RIG-$40), a leading deep-sea oil-drilling contractor, became a company of interest to Mr. Icahn last fall. This resulted in his obtaining Board representation, a substantially increased dividend and commitments to decrease costs and develop spin-offs of some assets as master limited partnerships.

Such spin-offs would be similar to SeaDrill a partnership floated by its closest competitor in 2012. SeaDrill (SDRL-$33) is a current recommendation primarily for its above-average yield. This is around 10% but now but investors lack confidence in forthcoming performance as international energy companies are reducing capital spending plans.

Neither SeaDrill nor Transocean are likely to be hot price performers over the next few months. Their high although variable dividends still make them attractive for patient investors, particularly for retirement accounts.

General Electric, Novo-Nordisk, Apple and eBay are continuing buy recommendations suitable for almost all investors. For those whose finances encourage more aggressive strategies, I suggest Mr. Icahn’s company, Icahn Enterprises, L.P. (IEP-$103). This holds a mixture of companies including Apple, Forest Labs, eBay, Chesapeake Energy Herbalife and CVR Refining. The quarterly dividend was recently increased to $1.50, resulting in current (but varying) yield of 5.9%. Mr. Icahn owns more than 85%.

His company contrasts with Warren Buffett’s Berkshire Hathaway (BRK.B-$123). Berkshire has a core insurance business, which provides it with ready cash flow. Its principal asset is really Mr. Buffett, who has created a legendary track record as well as many more polite public comments than Mr. Icahn.

Berkshire is the better value in relation to its book value although both companies undoubtedly have an “intrinsic value” exceeding their calculated book values. Mr. Buffett’s company has a remarkably stable price history and hardly blinked during the financial crisis. Icahn Enterprises crash dived like a submarine but has bounced back vigorously. Berkshire has a stockholder return of 100% over the past 10 years while Icahn Enterprises (with dividends reinvested) returned 737%. It’s like buying shares in a pirate ship.






Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1995. [email protected] 949.494.1376/

800.697.2622 www.crowellroberts.com


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