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Carl Icahn

Carl Icahn is an old-school corporate raider who has reinvented himself as an altruistic activist investor in recent years. Icahn views himself as a man who solves problems that company managements are either unwilling or unable to solve themselves. 

Love him or hate him, Icahn’s career has been solid. In his own words, “I make all these billions because there are so many companies with problems that can easily be fixed.” And while 2014 wasn’t the best year for him, from 2011 to 2013, his fund returned 112% to the S&P 500’s 57%. 

While most of Icahn’s portfolio is weighted in energy and industrial stocks, Icahn is probably best known these days for his loud and enthusiastic endorsement of Apple Inc. (AAPL). Icahn’s hedge fund has about 18% of it capital invested in AAPL, so Icahn is clearly eating his own cooking. In a similar vein, 31% of his hedge fund is invested in his own MLP holding company, Icahn Enterprises LP (IEP). 

Late last year, Icahn made a bold call that Apple was undervalued by half. I think Icahn’s estimates were a little unrealistic (Icahn sees Apple Pay accounting for 30% of all debit and credit card purchases by 2017, for example), but I share his enthusiasm for Apple stock. At today’s forward price-to-earnings ratio of just 14%, Apple trades at a deep discount to the broad S&P 500. And yet, Apple is the most profitable company in history, and has a rock-solid balance sheet that most companies would kill for. 

As I wrote earlier this year, Apple could simply break even for the next 10 years, not making a dime of new profit, and it would have enough cash to maintain its dividend at current levels. Stop and think about that for a minute. 

And to really put it in perspective, if Apple’s cash and marketable securities were a stand-alone company, they would be the 22nd biggest company in America by market cap.

Warren Buffett

Of course, no list of the masters of the universe is complete without a mention of the Oracle of Omaha himself, Warren Buffett. 

Buffett is the most famous investor alive today. In fact, he might be the most famous investor in history. And guess what: His reputation is well earned. Over the past 35 years, he has grown Berkshire Hathaway Inc.’s (BRK.A) book value at a 19% annual clip. That’s nearly 60% higher than the S&P 500’s annual return of 12% over the period. 

Buffett famously avoids technology companies, preferring to stick with stodgy old companies that he understands. He made a major exception when he started buying shares of International Business Machines Corp. (IBM) in 2011. Through subsequent purchases, IBM has since grown to become Berkshire Hathway’s fourth-largest holding, at 11% of the portfolio. And Buffett is still aggressively buying. With the exception of a brief hiatus in 2013, Buffett has accumulated more shares of IBM in every quarter since the Q2 2011. Buffett now owns nearly 8% of IBM’s outstanding stock. 

Perhaps Buffett should have stuck to his guns about not investing in technology. IBM has thus far been something of a bomb for the Oracle. His average price is about $176, below today’s price. And this during a period that has seen the S&P 500 absolutely soar. 

All the same, things might be turning around at Big Blue. The last earnings release came out better than expected, and shares are up about 6% year-to-date.

Mohnish Pabrai

Next up is self-professed Buffett “Mini Me” Mohnish Pabrai. 

Pabrai has made no secret of his admiration for the Oracle, and he considered the $650,000 he paid to have lunch with Buffett one the best investments of his life. Pabrai runs a small hedge fund that is, alas, closed to new investors. But you can enjoy his insights via his very readable book, The Dhandho Investor. I personally keep a copy of his book close to my desk, and I recommend that you do the same. 

So, what is Pabrai buying these days? Try cars. Pabrai runs a concentrated portfolio with 11 current stock holdings, and Fiat Chrysler Automobile FV (FCAU) is one of his newest additions. 29% of his portfolio is invested in Fiat Chrysler, and another 18% is invested in warrants of General Motors Company (GM). 

While I would never have the cajones to put nearly half my portfolio in just two positions, I share Pabrai’s enthusiasm for auto stocks, and I am long General Motors myself. But FCAU is working out just fine, with shares up more than 40% year-to-date. Pabrai is also heavily invested in banks. Bank of America Corp (BAC) and Citigroup Inc (C) make up a combined 22% of his portfolio.

Seth Klarman

Seth Klarman of The Baupost Group may very well be the smartest man the finance. He’s certainly one of the most successful. The dirty little secret of the money management profession is that we all have Klarman envy. We don’t just want his returns; we actually want to be him, have his super-human emotional control and be able to wield that power of that brain of his. 

Alas, all of us mortals will have to settle for reading his out-of-print book — which sells on Amazon for thousands of dollars. So desperate are value investors to get their hands on a copy of Margin of Safety, I expect that plenty would be willing to do back-alley deals with men in trench coats. 

So, what is Mr. Klarman buying these days? His largest position, and one that he has been steadily adding to over the past year, is Cheniere Energy, Inc. (LNG). Cheniere makes up 19% of Klarman’s portfolio, and he owns about 6% of the shares outstanding. 

Klarman’s portfolio allocation is interesting given the recent collapse in the price of crude oil. Energy stocks make up about a third of his holdings, but Cheniere is a little different from your standard oil and gas stock. LNG is primarily a play on the exportation of liquefied natural gas (“LNG”) via its two LNG terminals on the Gulf of Mexico. 

Given the rock-bottom pricing in energy these days, betting big on LNG exports might seem risky. But I’d consider the inherent risk of the sector to be small in comparison to the risk of betting against the likes of Klarman.

David Tepper

David Tepper of Appaloosa Management LP might not quite have the name recognition of a Warren Buffett or a Carl Icahn, but he should. He’s one of the best distressed investment specialists in the world, and his returns make him one of the most successful hedge fund managers in history. 

The best investments of Tepper’s career were made in 2009, when he aggressively bought shares of the major banks. Tepper understood “too big to fail” before it became a household expression, and was confident that the banks would be bailed out rather than nationalized. Tepper reportedly made $4 billion in personal profits on bank stock investments in 2009 and finished the year with 132.7% returns.  

So, what is Mr. Tepper buying these days? 

Well, his largest holding is General Motors, at 13% of his portfolio. Apparently Mr. Tepper and Mr. Pabrai are reading out of the same play book. 

But today I want to focus on a smaller addition, American Realty Capital Properties Inc (ARCP). Tepper’s stake in ARCP is modest, at less than 1% of his portfolio. But given his expertise as a distressed investor — and given ARCP’s status as a pariah stock — I find it noteworthy that Tepper is buying. 

If you recall, ARCP had an accounting scandal last year that brought back memories of Enron. The stock lost about a third of its value when the news broke and was forced to suspend its dividend indefinitely. But ARCP is not Enron. It’s a real estate investment trust with a solid portfolio of cash-flowing properties and a new management team. 

I expect ARCP to reinstate a competitive dividend later this year, and I consider the stock an absolute steal at current prices. Today, we can buy ARCP for less than the $9.80 Tepper paid. As of yesterday, ARCP traded hands at just $9.18 per share.

Bill Ackman

Finally, we come to Bill Ackman, principal of Pershing Square Capital Management LP. 

Ackman has had his share of egg on his face in recent years with his botched turnaround attempt at JC Penney Company Inc (JCP) and his high-profile investigation and short of Herbalife Ltd. (HLF). (The exact figure is unknown, but Ackman is believed to be down about a quarter of a billion dollars on his Herbalife short.) 

But while Ackman’s screw-ups get a lot of attention (call it schadenfreude), his returns make him a force to be reckoned with. Pershing Square made about 40% for its investors last year … a year in which the average hedge fund was lucky to deliver 2%. Ackman runs a highly concentrated long portfolio, with only eight listed names currently making the cut.  But it was one of his smaller holdings that caught my eye today, Howard Hughes Corp (HHC), which makes up about 3% of Ackman’s long portfolio. Ackman’s fund owns about 9% of the total shares outstanding. 

Howard Hughes was a wildly successful captain of industry with major interests in aviation and Hollywood movies. Of course, he is probably best known for being a wildly eccentric recluse who stored his own urine in jars and would go months without cutting his fingernails. 

Howard Hughes Corp is a collection of real estate assets and development projects, some of which have grown from investments originally made by Hughes himself. The company has major master planned community projects in the affluent Houston exurb The Woodlands, Summerlin in Las Vegas, and others that combined total 14,000 acres of unsold property. HHC also owns a portfolio of retail and mixed-use properties in several cities, including the Seaport District in New York City and Ward Village in Honolulu. 

I would view HHC less as a speculation and more as a long-term asset play, and it appears that Ackman feels the same way. He’s held the shares since 2010.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.