Following a legendary investor into a stock can be a compelling proposition, but should investors actually do it? Recently, Carl Icahn has been in the news with huge gains from positions in Apple, Netflix, and Herbalife to name a few. One rarely mentioned position is the one that Icahn has been accumulating in Nuance Communications (NASDAQ:NUAN) on each drop of the stock.
While Icahn has been very successful with numerous positions, the biggest risk for somebody following his moves or any other legendary investor is that they can exit a position and cause the stock to crash before the small investor even knows what happened. Another major concern is chasing a position after somebody of the stature of Icahn files for a greater than 5% holding. The stock typically surges on the initial news flow, but it typically falters in the following months absent any material news at the company. If an investor can purchase shares for a lower price, the stock clearly has more appeal. Let's review to see if Nuance offers such a situation.
Icahn has made several distinct moves to acquire shares in Nuance starting back in April. The position size is now at 16.9% of the outstanding shares. The news is encouraging to long-term investors, especially after Icahn made a substantial purchase after the recent weak earnings report in August. In total, Icahn owns 52,437,750 shares acquired via numerous investment partnerships and funds for $994.9 million according to this latest filing. Based on those numbers, the average purchase price would be right around $19.
The purpose of the latest transaction is listed that a belief exists that the shares are undervalued. The filing also shows an interest in Icahn adding persons to the Board of Directors of Nuance.
The maker of speech recognition technology continues to struggle with a shift from perpetual licenses toward subscriptions or recurring revenue. While the company is seen as a leader in the mobile speech recognition space, it is due to face more competition in the future with many of the tech titans making a move into the sector. Nuance has promising prospects, but the biggest frustration by investors is the general lack of a corporate strategy and the never-ending mergers. It is really difficult to determine if the company is a health care transcription business, a mobile business sold to carriers, or a virtual assistant for enterprises. All these businesses might work together using a basic core speech recognition technology, but up to now the company has been unable to make these different units gel.
Reading the supplemental data for the earnings release, one can only get excited over the potential for natural-language products in the medical records field, mobile communications, or virtual assistants. The company reported some interesting trends, including the 80% increase in cloud transactions during its third quarter and a surge in bookings for the Nina on-demand, virtual assistant. In total, the on-demand bookings increased 11% year-over-year to $2,1 billion. The disappointing part was the need to let mobile revenue decline in order to hold firm on pricing.
The company has numerous catalysts to drive growth plus the ability to generate positive operating cash flow that amounted to over $85 million in the last quarter.
Other positions not performing so well
Icahn takes positions in stocks for various reasons from attempting to force corporate change to investing in a undervalued equity. While recent positions in Apple and Netflix garner the most attention, the position in Navistar (NYSE:NAV) resembles Nuance the most. Also, the recent failure to elicit change and take control of Dell (UNKNOWN:DELL.DL) is a prime example that his moves don't always work out.
Icahn made an infamous purchase in the struggling commercial truckmaker back in early October 2011 with the stock around $30. In total, his enterprises bought 7.1 million shares for a 9.8% position. After an engine failed to meet the new EPA standards, the stock has been on a rocky road over the last two years. Icahn has continuously added to his position. Though the stock might have appeared cheap at $30, it eventually swooned below $20 before the rebound that has it sitting at around $37 now. Any investor following Icahn into this venture around the same time back in October would've had a disappointing couple of years. Conversely, anybody buying at prices substantially below his initial purchase price would actually be somewhat satisfied with the gains. Another sign that price matters, even for long-term investors.
With Dell, Icahn proposed a major stock repurchase plan that would supposedly unlock value trapped in the balance sheet, yet he was never successful in gaining control of the company over the bid by founder Michael Dell. Any investor following him into the position would've ended up with not much to show for months of effort.
Carl Icahn is a great ally to have if a long-term investor believes a company is undervalued and needs to make some corporate changes to unlock value. His moves have worked well in several cases, but in others the results haven't been spectacular. In the case of Nuance, the verdict is still unknown, but the company appears ripe for an activist to unlock value in the appealing technology accumulated by Nuance over the years. At the current levels, investors can participate in the potential changes at Nuance at the same prices as Icahn.
Mark Holder and Stone Fox Capital Advisors, LLC have a position in Nuance Communications. The Motley Fool recommends Nuance Communications. The Motley Fool owns shares of Nuance Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.