4 reasons to avoid Icahn Enterprises shares

Icahn Enterprises (NASDAQ: IEP) stock price has been one of the worst performers in Wall Street this week. Shares of Carl Icahn’s company closed the day at $28.52 on Thursday, the lowest level since April 2020. As a result, the company’s market cap has plunged to $11.52 billion while Carl Icahn’s net worth has evaporated by over $10 billion this year. He is worth over $13 billion.

Is Carl Icahn running a ponzi scheme?

IEP stock price plunged this week after Hindenberg Research published a critical report, which we wrote about here. The report alleges that the company’s assets in the energy and real estate industry are inflated and that the company was trading at a much premium valuation than its peers. 

He compared the company’s valuation to other similar funds and found it grossly overvalued. At the same time, he accused Icahn of running what seems like a ponzi scheme by taking money from new investors to reward older ones. The report said:

“Icahn has been using money taken in from new investors to pay out dividends to old investors. Such ponzi-like economic structures are sustainable only to the extent that new money is willing to risk being the last one “holding the bag.”

Carl Icahn has defended his company. And on Thursday, the firm said that it will continue with its $2 a unit distribution. The next key catalyst for the shares will come on May 10 when the company will publish its financial results. Analysts expect that the company’s revenue will come in at $2.8 billion and its profit per share will be at 19 cents.

Why you should avoid IEP stock now

There are several reasons why you should avoid IEP stock now despite the 15% dividend yield. First, in most cases, companies targeted by Hindenberg Research tend to underperform for a while. Examples of these companies are Adani, Block, and Nikola. In other words, it will take a while for the stock to recover.

Second, any IEP stock recovery could be a dead cat bounce. This is a situation where an asset in a sell-off bounces back temporarily and then resumes the bearish trend. Therefore, placing a buy trade in such a period tends to lead to a loss. Instead, you should wait for a clear rally to happen before you buy.

Third, Icahn Enterprises owns energy companies like Occidental (NYSE: OXY), CVR Energy, Southwest Gas, and Cheniere among others. As I wrote this week, oil and gas prices are crashing despite support by OPEC. Therefore, there is a likelihood that these energy companies will have weak results this year.

Further, as Hindenberg noted, Icahn Enterprise will have a difficult time maintaining the distributions in the future considering that it pays more money than it brings in.