Very rarely can a single stock make you a millionaire. Icahn Enterprises (IEP -0.12%) is no exception. Investing in this stock should be part of a diversified approach focused on long-term results. But that doesn't mean shares can't provide meaningful upside to your investment portfolio, especially at today's depressed prices.
In the past year, Icahn Enterprises stock has lost roughly two-thirds of its value. Many investors are taking a closer look, given the company is controlled by a well-respected investor, Carl Icahn. The last time the stock price was this low, shares went on to rise 1,000% in value.
Can Icahn Enterprises stock help your portfolio surpass the $1 million mark?
If you like Berkshire, this stock should be familiar
One of the best millionaire maker stocks in history is Berkshire Hathaway, led by legendary investor Warren Buffett. Since 1965, Berkshire shares have achieved annualized returns of nearly 20%.
What makes Berkshire so special?
At its core, Berkshire is a simple holding company. The firm owns stakes in hundreds of businesses -- it owns some outright, like Geico, and invests in a portion of others, like Apple -- and the company's stock price is a reflection of that portfolio's performance. Buffett and his partners manage the portfolio, investing capital where they believe returns to be the highest.
In many ways, Icahn Enterprises is a miniature Berkshire. It is essentially a holding company, with dozens of investments across many industries and geographies. Instead of Warren Buffett at the helm, however, there is Carl Icahn, another legendary investor with a net worth of around $6.5 billion.
Don't mistake Icahn Enterprises for the next Berkshire
While Icahn Enterprises has a similar operating structure to Berkshire, most of the similarities end there.
Buffett has long been renowned for his long-term investing approach. Many positions in Berkshire's portfolio have remained for decades.
Icahn, in contrast, is known for his short-term bets. In the 1980s, he became known as a corporate raider, forcing the sale of companies or perhaps simply shaking up their executive teams. He continued this reputation into recent decades, with many positions liquidated within a few years, or even a few months, of making the bet.
Icahn's high-stakes investment strategy has produced several booms and busts for Icahn Enterprises stock. Berkshire shares, meanwhile, have remained relatively stable. And while Icahn outperformed Buffett for most of the period from 2000 to 2020, the equation was flipped on its head after Icahn Enterprises stock nosedived in value.
So, Icahn Enterprises may be a miniature Berkshire, but their investment strategies -- and, therefore, the volatility of their stock prices -- couldn't be more different.
Why exactly have Icahn Enterprises shares lost two-thirds of their value over the past year? There are three primary reasons.
First, the company's investment portfolio simply hasn't performed well. While stock markets have surged in recent years, the company's investment portfolio has consistently produced losses. In 2021, the value of its investments segment fell by 0.3%. In 2022, losses grew to -2.4%. Last year, losses accelerated to -16.9%.
The second factor has been the weight of a short-seller report issued by Hindenburg Research. At the time, the report questioned the company's valuation, saying the stock traded at "a 218% premium to its last reported net asset value (NAV), vastly higher than all comparables."
The third factor, which the short-seller report also brought into question, was the sustainability of the company's dividend policy. For years, Icahn Enterprises paid a $2 per share quarterly dividend. Investors believed they could invest alongside Icahn all while receiving a dividend yield of 10% or more. As these investors soon discovered, if something appears too good to be true, it probably is.
Is it time to bet on a turnaround?
After the recent plunge in share price, many investors are considering Icahn Enterprises stock. If shares returned to their all-time highs, there would be nearly 7,000% in upside.
Before jumping in, however, there are a few things you should know. The charts below tell the entire story.
As you can see from the charts above, Icahn Enterprises stock largely traded sideways from early 2020 to early 2023. The dividend yield over that period of time was nearly 15%. Therefore, investors were earning 15% annual returns, even with a stagnating share price.
The problem, however, was that the company couldn't afford it. Due to losses in its investment portfolio, the value of its underlying assets wasn't increasing at a fast enough pace to support such a big dividend.
Therefore, the book value of the company's assets began to fall. If the stock price remains unchanged yet the book value of assets falls, that means a stock's price-to-book ratio should rise. And that's exactly what happened. From 2020 to 2023, Icahn Enterprises valuation rose from around 2 times to nearly 6 times book value.
Keep in mind that Berkshire stock currently trades at its highest valuation in years, yet shares still only trade at just 1.5 times book value. Paying 6 times book value for Icahn Enterprises soon proved untenable, and the stock price plummeted to reflect the mispricing.
So far, Icahn Enterprises has slashed its dividend in half, but the dividend yield remains above 20%. This is clearly not sustainable. Only two futures currently exist. Either the company's investment portfolio experiences a sudden surge in value -- providing a boost in assets to lift the stock price and sustain the dividend -- or the dividend will be cut again. If history is any indication, another dividend cut should arrive as soon as this year.
It might be tempting to take a bet on Icahn Enterprises stock. Shares currently trade at their lowest valuation in years and sport a huge dividend yield. Icahn, meanwhile, remains at the helm.
But this is probably not the millionaire maker stock it pretends to be. Shares still trade at a 70% premium to Berkshire, which arguably has a higher-quality business and savvier leader. And unless Icahn Enterprises has a trick up its sleeve, the dividend rate will be cut over the next few quarters.
Might Icahn Enterprises stock rise in 2024? Anything is possible. But the stock is more of a gamble than an investment today.
