The dot in the chart of Forest Laboratories (NYSE: FRX) above indicates when Carl Icahn started to significantly increase his stake in the pharmaceutical company – 17 August 2012.
According to Insider Monkey at the time FRX had a traded at a price to earnings ratio of 12.1:
…below the industry average (25.2x), Pfizer (20.6x), Eli Lily & Co (12.9x) and Allergan (26.1x). More importantly, Forest Laboratories’ earnings valuation is also below its own 5-year (12.6x) and 10-year (18.7x) historical averages – Jake Mann, Insider Monkey
This was a classic prominent company going through a period of temporary trouble.
In fact Jake Mann mentions that FRX’s woes were the result of losing its patent on an anti depressant drug called Lexapro which should have tempered the markets overreaction due to a slew of FDA approvals.
Here’s what Icahn said he hoped to achieve after winning a board seat at the time (requires flash player):
Its clear that Icahn believed that FRX had great potential due to a great pipeline and there was room to cut expenses among other reasons.
What Are The Takeaways From Icahn’s Investment?
Value realisation took 18 months.
That’s a long time for most people but what strikes me is the conviction Icahn had in his own team to not only get a board seat but to push for changes that saw value realised.
Rumours of FRX being a takeover candidate probably helped in this regard but individual investors should take away one thing and one thing only: when you have done your research to the best of your ability and as a result have gained a stronger than usual conviction about a positive outcome, then its time load up.
I’m not talking about using 25% of your capital with margin, I’m talking about buying just that little bit extra.
FRX was Icahn’s largest position in 2013 and his second largest position going into 2014, clearly he puts his money where his conviction is and individual investors can mimic this tendency when the research tells you to strive for outperformance.
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Images: Yahoo! Finance