Carl Icahn Snaps Up Shares of Family Dollar

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On Friday after the market closed, we learned that activist investor Carl Icahn took a 9 percent stake in the floundering dollar store chain Family Dollar (NYSE:FDO). The stock soared 10 percent on the news. Icahn is known for his active engagement in his investments. He will take a stake in a company such as Family Dollar, try to win seats on the board of directors, and push the company in a direction that he believes to be shareholder friendly. Judging by his track record, this is a successful strategy. But will it work for Family Dollar, and should you follow Icahn into the stock despite the fact that it is up 10 percent after hours?

Family Dollar has been the worst-performing company of the three that comprise the dollar store industry: Family Dollar, Dollar General (NYSE:DG), and Dollar Tree (NASDAQ:DLTR). The dollar stores have been among the best-performing stocks in the market over the past several years. Since going public in late 2009, Dollar General shares are up more than 100 percent. Dollar Tree, the fastest grower in the sector, has risen nearly 500 percent in the past 10 years.

While Family Dollar has also been a strong performer, the stock has languished as of late. After peaking at around $75 per share last year, the stock traded as low as $55 per share earlier this year, when the company reported weak earnings in April. The reason for this weakness is that the company became overextended: It opened too many stores, many of which were not profitable. As a result, the weakness in the retail space late last year and earlier this year led to a decline in the company’s profits, and it decided to close more than 300 of its worst-performing stores.

With this downsizing announcement, Family Dollar shares appear to have hit a bottom. The stock hasn’t traded below its April 11 low of $55.64 per share. However, now Icahn is interested in the company. He hasn’t given explicit reasons for taking his position — it was announced via Twitter — although I think it is pretty clear that he believes that if the company executes more effectively that it can be in a better position to benefit from the fact that consumers are finding ways to reduce their spending.

With that being the case, I think the stock is far less attractive today than it was on April 11, when it bottomed and when I recommended it. If you were fortunate enough to get in at or near the low, now may be the time to take some trading profits — you already have a 20 percent gain. But from the perspective of a longer-term investor, the stock may still be worth buying. Not only is Icahn working to improve the company, but consumers are still trending down, meaning that there is more upside in the dollar store industry.

You have to ask yourself, however, whether you want to bet on this trend or whether you want to bet on Icahn. If it’s the former, then Family Dollar no longer trades at a discount to its peers. Therefore, it is now time to consider taking positions in Dollar Tree, the fastest grower in the industry, or Dollar General, the largest company in the industry and probably the industry’s leader.

If you want to buy Family Dollar because you like the idea of investing with an activist investor or you like the idea of investing with Icahn in particular, then why not simply buy his company, Icahn Enterprises LP (NASDAQ:IEP)? Icahn Enterprises is like a publicly traded hedge fund managed by Icahn. If you buy the stock, you invest with him and get to participate in all of his activist endeavors, which include:

  1. Apple (NASDAQ:AAPL)
  2. eBay (NASDAQ:EBAY)
  3. Forest Laboratores (NYSE:FRX)
  4. Herbalife (NYSE:HLF)

The stock trades at roughly twice the value of the assets, but you get access to one of the most successful investing minds in the business. It also pays a nearly 6 percent dividend, which is something you don’t get with any of the companies found in the fund.

Disclosure: Ben Kramer-Miller has no positions in Family Dollar or in any of the stocks mentioned in this article.

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