Carl Icahn, a major investor in Chesapeake Energy Corporation (NYSE:CHK), has cut his stake by half, and the immediate reaction of investors to this is panic. But in a post on Seeking Alpha, Brandon Dempster states that the sell-off in the stock is overdone and that it offers a discount to interested investors.
Is Icahn doing this for tax purposes?
Icahn has reasons for cutting his stake, and they are not related to the energy company. Instead, he said is doing it to gain a tax benefit. This statement by Icahn is interesting because the usual tax-selling month is December when many investors across all tiers attempt to get the highest amount of possible itemized deduction by selling some of their underperforming investments, says Dempster. In addition, as per United States law, he is allowed to claim only a $3,000 itemized deduction if his losses are more than his gains and he is really doing it for tax purposes.
Chris Hohn the founder and manager of TCI Fund Management was the star speaker at this year's London Value Investor Conference, which took place on May 19th. The investor has earned himself a reputation for being one of the world's most successful hedge fund managers over the past few decades. TCI, which stands for The Read More
“This is an amount he likely spends on a single steak dinner, so if it truly is for tax purposes, he’s doing it through his fund in the manner of an NOL and carrying it forward the next couple of years,” says Dempster.
Previously, Icahn’s stake was reported at 9.4%, and now it is at 4.55%. In after-hours trading, the shares declined nearly 5%, which makes no sense as there has been no change in the fundamental situation. It has only improved over the past few months, Dempster notes. Icahn didn’t cut his stake even when the energy company was on the verge of bankruptcy, indicating a lot about his outlook on the company.
Plenty of catalysts for Chesapeake
Dempster says the sale provides an opportunity to prospective shareholders. With the stock down 7.35% in Monday’s trading and an additional 5% after hours, investors are being offered “a meaningful discount to a strong risk/reward scenario for a company with significant growth catalysts and a positive outlook on the macro environment.”
One of the catalysts he noted was La Nina, which is seen as a big positive for natural gas and could occur by December. The second is the continuation of divestments, which helps the energy company “lean out and improve liquidity.” The third is improving Henry Hub prices, and the last is the massive risk/reward scenario in which even a price target of $10 offers a 35% return on Investment, he believes.
Icahn’s selling may have repercussions for the stock for days, but, “I’d be surprised if equity holders didn’t recognize the discount and swing it back up towards the $7 level,” Dempster says.