Historical Price to Earnings Ratios By Industry

James Bailey4 Comments

Getting long-run historical PE ratios of US stocks by industry seems like the kind of thing that should be easy, but is not. At least, I searched for an hour on Google, ChatGPT, and Bing AI to no avail.

I eventually got monthly median PEs for the Fama French 49 industries back to 1970 from a proprietary database. I share two key stats here: the average of median monthly industry PE 1970-2022, and the most recent data point from late 2022.

IndustryLong Run MeanEnd 2022
AERO12.1419.49
AGRIC10.759.64
AUTOS9.6517.52
BANKS10.3810.46
BEER15.2335.70
BLDMT12.0015.41
BOOKS12.9517.60
BOXES12.1810.69
BUSSV12.0713.03
CHEMS12.4019.26
CHIPS10.4817.47
CLTHS11.4510.94
CNSTR8.984.58
COAL8.042.92
DRUGS1.148.01
ELCEQ10.7817.85
FABPR10.2819.40
FIN11.1612.97
FOOD14.3025.03
FUN9.1021.06
GOLD3.18-5.95
GUNS11.505.05
HARDW7.9619.16
HLTH11.916.09
HSHLD12.6020.15
INSUR10.9516.33
LABEQ13.4625.18
MACH12.5120.27
MEALS13.8319.19
MEDEQ6.8127.64
MINES8.0616.27
OIL6.969.00
OTHER12.2027.68
PAPER12.5016.69
PERSV12.86-0.65
RLEST8.13-0.30
RTAIL12.268.58
RUBBR12.1112.81
SHIPS9.7917.42
SMOKE11.7417.79
SODA12.3832.09
SOFTW8.21-2.85
STEEL8.184.30
TELCM6.759.58
TOYS9.18-1.32
TRANS11.2513.11
TXTLS9.43-49.00
UTIL12.3417.41
WHLSL11.0813.13
Mean Industry Median10.5212.73

One obvious idea for what to do with this is to invest in industries that are well below their historical price, and avoid industries that are above it (not investment advice). Looking just at current PEs is ok, but a stock with a PE of 8 isn’t necessarily a good value if its in an industry that typically has PEs of 6.

By this metric, what looks overvalued? Money-losing industries (negative current earnings): Gold, Personal Services, Real Estate, Software, Toys, and Textiles. Making money but valuations 19+ above historical average: Medical Equipment, Beer, Soda. Most undervalued relative to history: Guns, Health, Coal, Construction, Steel, Retail (all 3+ below the historical average).

Of course, I don’t recommend blindly investing in these “undervalued” industries- not just for legal reasons, but because sometimes the market prices them low for a reason- that earnings are expected to fall. The industry may be in secular decline due to new types of competition (coal, steel, retail). Or investors may expect it to get hit with a big cyclical decline in an upcoming recession or rotation from the Covid goods/manufacturing economy back to services (guns, construction, steel, retail). Health services (as opposed to drugs and medical equipment) stands out here as the sector where I don’t see what is driving it to trade at barely half of its usual PE.

I’d still like to get data on long run market-cap weighted mean PE by industry, as opposed to the medians I show here. The best public page I found is Aswath Damodaran’s data page, which has a wide variety of statistics back to about 1999. Some of the current PEs he calculates are quite different from those in my source, another reason to tread carefully here. I’m not sure how much of this is mean vs median and how much is driven by different classification of which stocks fit in which industry category.

This gets at a big question for anyone trying to actually trade on this- do you buy single stocks, or industry ETFs? Industry ETFs make sense in principle (since we’re talking about industry level PEs overall) and also add built-in diversification. But the PE for the ETF’s basket of stocks likely differs from that of the industry as a whole. It would make more sense to compare the ETF’s current PE to its own historical PE, but most industry ETFs have very short track records (nothing close to the 53 years I show here). PE is also far from the only valuation metric worth considering.

All this gets complex fast but I hope the historical PE ratio by industry makes for a helpful start.

Disinformation Is Real, And It Is a Concern

Jeremy HorpedahlLeave a comment

Two recent essays push back against the concept of “disinformation” in thoughtful but, I believe, ultimately incorrect ways.

Martin Gurri is primarily concerned with government trying to stamp out what it views as disinformation. I am concerned about that too, but there are ways for private actors to correct bad information too.

Dan Klein (my friend and professor in grad school) argues that most labeling of “disinformation” or “misinformation” is not really about information, but instead about knowledge. I agree that sometimes this is true. But sometimes it is not true. Sometimes we really are talking about information. And sometimes the information is about extremely important topics.

As I search through my own Twitter history for these terms, I see that there is overwhelmingly one period of time and one piece of information that I used them for: the total number of deaths in the United States in 2020. If you can think way back to the fall and winter of 2020/early 2021, you might recall that we were just finishing up the first year of the pandemic, and we were also going through one of the worst periods in the pandemic. Vaccines were now starting to become widely available as we got into 2021, and people were starting to make person decisions about whether to “get the jab.”

The number of total deaths in 2020 was an important number. There was still a lot of uncertainty about exactly how bad the pandemic was, or (to a small but vocal minority) whether the pandemic was even “real.” The data was crucial to this debate. Of course, once we have the data, we must interpret it. This is one of Klein’s main points, and a good one. But if we aren’t starting from a common baseline of true information, there is really no point in discussions based on interpretations of those different apparent realities. We will, by definition, be “talking past each other.”

So what were people saying about total deaths in 2020 during this moment of importance in late 2020/early 2021?

Continue reading →

How Ceramic Pans Work and How to Restore Their Non-Stick Coating

Scott Buchanan6 Comments

I really don’t like the time and effort wasted in cleaning crudded-up frying pans, so I appreciate non-stick coatings. I have a small diameter Gotham ceramic pan that works well, and I was thinking of getting a larger one for cooking bigger loads. As usual, I went to the internet for wisdom on preferred ceramic pans to buy.

However, in the course of trying to get a fix on how they work, I fell down a rabbit hole. It turns out that this subject is complex and controversial. I will try to summarize my understanding in a brief post, with the caveat that I am not sure of everything here.

First of all, the “ceramic” coating is not really ceramic. Typical ceramics are made from firing powders of inorganic materials like silicon/aluminum oxides (including clays) at extremely high temperatures to where the particles fuse together. For the ceramic coatings on pans, this is not the case. I looked pretty hard on line without success to pin down the actual process or composition of the pan coating. It seems to involve some sort of silicone or silica polymer, applied using a sol-gel process. (Silica is just silicon and oxygen – quartz and white sand are pure silica – while silicone is typically a Si-O-Si-O-Si polymer with two extra hydrocarbon side groups attached to each Si).

100% silicone, in the form of rubbery sheets or cupcake papers for cooking on or in, is known to give a non-stick cooking surface. The “ceramic” coating in pans appears to be a solid equivalent of silicone cookware. A key factor mentioned in why it is slick and why it loses its slickness is that (supposedly) a thin layer of silica or silicone comes off with each cooking episode, and that thin layer is what gives the non-stick effect. (I would not mind ingesting a little adventitious silica, but eating random silicone worries me a little – but I don’t know if all this is actually true).

See this link for further discussion of the safety of ceramic versus teflon coatings. Be aware that makers of teflon coatings often choose names for their coatings that include the words “stone” or “granite”, perhaps to make the unwary consumer believe that these are ceramic coatings. My teflon pans have usually started to flake (into my food!) after a couple years’ use. A happy exception is a newer electric skillet which has temperature control so it never gets above about 425 F (high temperature destroys teflon). We do keep it oiled in use. Its teflon coating is still good as new after two years.

There seems to be general agreement that ceramic pans start off super slick, that fried eggs slide right out, but that after some months of use, food starts sticking noticeably. It helps to use a little oil every time you cook, and to avoid using metal utensils or abrasive cleaning pads, and to avoid very high temperatures or the use of cooking sprays (which deposit something harmful to the ceramic coating) or olive oil (which can burn on). Some users say it is important to clean the pan well between uses, e.g., using salt as a mild abrasive.

Why Do Ceramic Pans Lose Their Non-Stickiness?

There seem to be two main schools of thought as to the deterioration of performance. One school points to the (alleged) continual loss of silica particles or (presumably oily) silicone from the surface; perhaps once this surface layer is depleted, it’s game over. Another camp points to the buildup of burned-on deposits, even very thin, nearly invisible deposits, that then become a locus of food sticking.

What Can Be Done to Restore a Ceramic Pan Coating?

It is common to read that you just have to be prepared throw the pan away every 1-2 years. However, this does not seem economical. Can these pans be salvaged?  One author claims that slickness can be restored by “seasoning” a ceramic pan, similar to how cast-iron pans are treated: after cleaning the pan, rub a very thin layer of a recommended oil (e.g. soybean oil, not olive oil) on the pan and then heat it to the smoke point. This should bond a polymerized oil layer to the surface. I have not tried this, but it might be worth a try.

A diametrically opposite approach is recommended by the maker of GreenPan ceramic pans. Here the theory is that if an offending film of cooked-on crud is removed, the native, clean ceramic layer beneath will once again be non-stick. A wet Magic Eraser type cleaning pad is recommended.

A similar remedy touted on the internet (e.g. here and here) is to rub with coarse salt (for long time, but not too hard) to get down to a pristine ceramic surface. Good results are claimed.

As a (retired) experimental scientist, I was itching to try something like this. At a family member’s house, I found an older ceramic pan that was not in really bad shape, but had lost its primal non-stick.

The BEFORE picture is above. There was a persistent brown film in parts of the pan, and cooked omelets (my test vehicle) did not simply slide out. I cleaned the pan with soap and water and a sponge, then went at it with a wetted Magic Eraser. I got the brown film off, though you could still see some pitting in the coating due to the use of metal utensils.

The AFTER picture is below. This is after cooking yet another omelet (with oil), and just wiping the pan with paper towel afterward. I can’t say that it was a night and day difference, but the Magic Eraser treatment definitely seemed to improve the performance. Score one for sustainability.

APPENDIX:  Finally Understanding What Make Ceramic Pan Coatings Non-Stick

As noted in the original article above, I was puzzled over how the ceramic coatings worked. The descriptions in articles I could find on-line talked of forming these coatings from sol-gel solutions, using ingredients such as tetraethoxysilane. Without going into details, my chemical intuition led me to believe that, yes, you could form a dense silica pan coating from that, but the final outer surface would have Si-OH groups, like quartz or glass or ordinary “enamel” ceramic pan coatings. This would not give the oily, silicone-like surface that is evident with the nonstick ceramic pan coatings.

My “Aha” moment came when examining a patent application ( United States Patent Application No. 20180170815) for making a GreenPan ceramic pan coating. Among the ingredients for making the coating is methyltrimethoxysilane (MTMS).  And THAT should give Si-CH3 groups on the outer surface, which is exactly the type of oil-like outer surface that silicone has.  (The -CH3 methyl group is a fairly nonpolar, “oily” hydrocarbon type group).

A restless itch has now been scratched. I think I now understand why fresh ceramic pan coating can have such fine non-stick properties, and perhaps why they might be vulnerable to losing their non-stick properties. With Teflon type pan coatings, it is plasticky, oily Teflon all the way down, so if you abrade off a hundred molecular layers, it should make no difference. But with the ceramic coatings, it is not clear to me whether the oily Si-CH3 groups are only in the topmost atomic layer; maybe if that gets abraded off, there is only the quartz-like Si-OH groups to be found; or maybe there is a substantial (in atomic terms) topmost layer rich in Si-CH3 groups. Anyway, it makes sense to keep using oil when cooking on ceramic pans, to keep a hydrocarbon-type surface coating going there, and to avoid using metal utensils that can scrape and scratch the coating.

Economists should fix our own monopsonistic market before we tell everyone else what to do

mdmakowskyLeave a comment

Perhaps the reason there is so much curiousity and handwringing over monopsony in economics these days is that tenure-track researchers themselves are employed within an extremely monopsonistic market:

Let’s take the findings at face value, and say that all faculty at the various stages of tenured and tenure-track academic appointments work within a monopsonistic market. Let’s also accept that it is reducing not just wages, but total compensation inclusive of all benefits and compensating wage differentials. What’s the solution?

I mean, so much of the monopsony literature circles back to the policies and industrial institutions that researchers, wonks, and advocates think will improve worker welfare. Well, if *we*, the researchers in question are so confident in our findings, our models, and our policy recommendations, what have we done to improve our own market? Have we done anything? Can we do anything?

I heard someone in the back yell “We unionized!” Okay, that’s great. I just I could say “More unions” and end the post, but I’m not confident that this is a problem that unionization, absent additional innovation, is going to solve. Don’t worry, I have an idea.

Release sheets. I’ll explain.

At the moment, the majority of academics opearate under administrative regimes that think the best way to keep faculty costs down is leverage employee exit costs to the absolute hilt. That means, more than anything else, that the only way to get a non-trivial raise is to have a formal letter offering you a job at another university, with a start date, salary, and benefits all enumerated. Only then will the department/college/university consider offering you a “retention” raise. The administration’s hope is the the cost of pursuing an outside offer combined with the cost of moving to a new area (“local” outside options are almost non-existent in academia) will deter you from pursuing them, reducing the probability of receiving one.

The problem with this tactic is that it discourages faculty from contributing, participating, and investing in all of the public goods that make a department and university successful. Every investment ties the researcher to the school and community, raising their exit costs and, in turn, lowering their expected probability of pursuing and receiving an outside offer. Contributing to public goods reduces expected future wages. “Retention raises only” insititutions undermine the mission of their own faculty by incentivizing their faculty to be as independent, aloof, and myopically selfish as possible.

Now, the obvious solution here for universities is to simply preempt the market by raising salaries to better match their market value, but that would require both having a clear and unified vision of what their product and mission are (good luck) and not giving in to the overwhelming temptation to capture rents on labor wherever they can (fat chance). If there is one unifying attribute of bad managers everywhere, its conflating rent maximizing with profit maximizing. Yes, I know there is definitional overlap, but we’ve all known a manager that confuse percentage returns for absolutes, acting as if paying $3 for $5 of marginal labor product is better than paying $8 for $11.

If you want faculty to contribute to public goods, you’re going to have to give them something as compensation for their higher exit costs. I suggest exchanging reduced asymmetric information for enduring higher exit costs. How? The two-part release sheet.

The idea is actually pretty straight forward. Part one: every employee contract includes a release sheet that includes a retention ceiling that the university promises it will not make a retaining offer in excess of. If you have a retention ceiling at $200k a year, then another school can come and offer that with absolute confidence that they will have a real shot at landing the employee. This encourages rival schools to make the investment in scouting and recruitment. It lowers the cost of making offers that will raise someones income. More offers, more raises, less rents.

Part two: the merit raise ladder. Between the employee’s current salary and their retention ceiling is a schedule of merit raises. At each step of the ladder, the department evaluates the employee’s revealed productivity since their last evaluation and decides whether to give a raise. The tartgeted amount of the raise is pre-determined. If the employee receives an amount less than the pre-determined full target raise amount, the difference is subtracted from their retention ceiling. Let’s go through an example:

Contract A: $150k/ year. 6 year contract. $10k raises at years 2 and 4. Retention ceiling: $225k/year.

That means that after year 2, the department can give a raise. If they raise their salary by $7k a year (total 157k), then their retention ceiling is lowered (7-10 = -3) to $222k. After 6 years the two parties have the option to renegotiate the whole package. If both parties can’t agree, then they simply project the old schedule forward, $10k every two years, differences lowering the retention ceiling. If salaries are frozen it’s entirely possible for the retention ceiling to drop below their actual salary.

I see a lot of benefits here, and not just for faculty. Everyone benefits from reduced assymetric information. A high retention ceiling doesn’t actually bind anyone’s hands – a rival university can still show up with any offer they like, the current employer simply retains the right to make an equal or higher retaining offer. Failure to keep up with employee market value, however, will quickly result in the vultures circling your best employees. At the same time, employees have greater incentive to continue contributing in every possible way to the department, and not just those that are visible on the outside. Departments will know that they have to keep salaries commensurate with total productivity or they will forfeit their right to make competitive retention offers.

We already have a central hub in academic economics: the AEA-JOE. We post job openings and vitaes on the JOE, we coordinate letters of references. Posting our retention ceilings alongside our vitaes would be a nearly costless addition.

Would their be other consequences? Almost without question. This is a blog post not a theory paper. But if we’re going to complain about monopsonistic markets, we should probably consider taking steps to fix our own.

New Paper with Evidence that ChatGPT Hallucinates Nonexistent Citations

Joy Buchanan3 Comments

I posted a new working paper with systematic evidence for false citations when ChatGPT (GPT-3.5) writes about academic literature.

Buchanan, Joy and Shapoval, Olga, GPT-3.5 Hallucinates Nonexistent Citations: Evidence from Economics (June 3, 2023). Available at SSRN: https://ssrn.com/abstract=4467968 or http://dx.doi.org/10.2139/ssrn.4467968

Abstract: We create a set of prompts from every Journal of Economic Literature (JEL) topic to test the ability of a GPT-3.5 large language model (LLM) to write about economic concepts. For general summaries, ChatGPT can perform well. However, more than 30% of the citations suggested by ChatGPT do not exist. Furthermore, we demonstrate that the ability of the LLM to deliver accurate information declines as the question becomes more specific. This paper provides evidence that, although GPT has become a useful input to research production, fact-checking the output remains important.

Figure 2 in the paper shows the trend that the proportion of real citations goes down as the prompt becomes more specific. This idea has been noticed by other people, but I don’t think it has been documented quantitatively before.

We asked ChatGPT to cover a wide range of topics within economics. For every JEL category, we constructed three prompts with increasing specificity.

Level 1: The first prompt, using A here as an example, was “Please provide a summary of work in JEL category A, in less than 10 sentences, and include citations from published papers.”

Level 2: The second prompt was about a topic within the JEL category that was well-known. An example for JEL category Q is, “In less than 10 sentences, summarize the work related to the Technological Change in developing countries in economics, and include citations from published papers.”

Level 3: We used the word “explain” instead of “summarize” in the prompt, asking about a more specific topic related to the JEL category. For L we asked, “In less than 10 sentences, explain the change in the car industry with the rising supply of electric vehicles and include citations from published papers as a list. include author, year in parentheses, and journal for the citations.”

The paper is only 5 pages long, but we include over 30 pages in the appendix of the GPT responses to our prompts. If you are an economist who has not yet played with ChatGPT, then you might find it useful to scan this appendix and get a sense of what GPT “knows” about varies fields of economics.

If SSRN isn’t working for you, here is Also a Google Drive link to the working paper: https://drive.google.com/file/d/1Ly23RMBlim58a7CbmLwNL_odHSNRjC1L/view?usp=sharing

Previous iterations of this idea on EWED:

https://economistwritingeveryday.com/2023/04/17/chatgpt-as-intern/ Mike’s thoughts on what the critter is good for.

https://economistwritingeveryday.com/2023/01/21/chatgpt-cites-economics-papers-that-do-not-exist/  This is one of our top posts for traffic in 2023, since this is a topic of interest to the public.  That was January of 2023 and here we are in June today. It’s very possible that this problem will be fixed soon. We can log this bug now to serve as a benchmark of progress.

A check in and comparison with Bing:

Comparing ChatGPT and Bing for a research literature review in April 2023

Pins to Patterns at AdamSmithWorks

Joy BuchananLeave a comment

I’m at AdamSmithWorks this week with “FROM PINS TO PATTERNS: FOLLOWING THE THREADS OF PRODUCTIVITY”

In the tapestry of human progress studies, two authors, Adam Smith and Virginia Postrel, have left their mark on the story of productivity and innovation. Their books, written centuries apart, both explore the power of specialization and the division of labor.

Part of the reason this came out this week is that I’m reading The Fabric of Civilization. So good! It had come highly recommended before, but I finally have an excuse to read it because I’m working on an article about fashion.

Supply & Demand, with Tables?

Zachary Bartsch2 Comments

When I was a graduate student, I paid for my tuition by tutoring for the university athletics department. I tutored stat, math, micro, macro, excel, and finance. I tutored the same students each week, so I got to know them pretty well over the course of the semester. I also got to know their strengths and weaknesses. It was at this time that I realized most quantitative or even analytical ideas could be described in 4 potentially equivalent ways:

  1. Mathematically
  2. Using logic in English
  3. Graphically
  4. With a Table

In this post I want to share the Supply & Demand cheat-sheet that I use to help my students learn about the effects of supply and demand.

Continue reading →

EWED Highlights: Investing

James Bailey1 Comment

I noticed that finance and investing have become one of our recurring themes here, and so I recently added an investing category for our posts.

Posts from before last week weren’t tagged with it, but I’ll take the chance now to highlight some of our investing posts:

Alternative Investing Ideas:

Is Equity Crowdfunding Beating Adverse Selection?

Potent Portfolio Diversifier: Managed Futures Funds Go Up When Both Stocks and Bonds Go Down

Series 65 for Economists

Unfashionable Investing

50% Endowment Returns Driven by Private Equity Investments: How Rich Universities Get Richer (But You Can, Too)

Safer / Yield-Based Investing Ideas:

Tough Year for Investing (with one little-known, totally safe exception)

Get Easy Government-Guaranteed 4% Interest on Your Money with Treasury Bills

High Yield Investments, 1: Some Benefits of High Yield Stocks and Funds

High Yield Investing, 2: Types of Funds; Loan Funds; Preferred Stocks

Posts on Economic Conditions Affecting Financial Markets:

Work From Home Sours Financing for Office Buildings, Which Threatens Regional Banks

Bulls and Bears Spar Over Pace of Inflation Decline and Rate Cuts

A Cornucopia of Financial Data from J. P. Morgan, Relevant to Investors

Raging Inflation, Spiking Rates, Plunging Stocks, Oh, My!

QE, Stock Prices, and TINA

Crypto Posts:

Bitcoin’s Dramatic Comeback: Resurrection or Dead Cat Bounce?

The Great Crypto Market Meltdown of 2022

The NFT Market Is Mushrooming – Why??

Crypto Drama: $40 Billon Vaporized as Terra “Stablecoin” and Luna Implode; Bored Ape NFTs Break Ethereum

On Famous Investors:

Get rich or get famous? Edward Thorp vs Myron Scholes

Warren Buffett’s Secret Sauce: Investing the Insurance “Float”

Big Picture / Economics of Investing:

What kind of return do we want on our investment?

Though the Market Is a Winner, Most Stocks Are Losers

Minor Investment

Dow 1,000,000?

Avoiding Intertemporal Idiosyncratic Risk

Social Security: Not a Great/Terrible Investment

Drivers of Financial Bubbles: Addicts and Enablers

Why Short Selling Is a Good Thing for the Stock Market and Investors Large and Small

Is College Enrollment Falling?

Jeremy Horpedahl2 Comments

A recent Wall Street Journal declares “More High-School Grads Forgo College in Hot Labor Market.” An accompanying chart and data show the apparent plunge, with just 62% of recent high school grads enrolled in college, down from 66.2% before the pandemic, and well down from the high in 2009 of 70.1%.

The article recites the usual reasons. The high and increasing financial cost of attending college. The increasing opportunity cost due to the “hot labor market” mentioned in the headline. Large numbers of young people getting apprenticeships: apparently a 50% increase over some unstated timeframe!

They give anecdotes. A 21-year-old male in Maryland was put off by the high cost of a four-year degree. He likes working on cars, so instead got a job as a service technician at a Toyota dealership.

We’ve heard this all before. In fact, we know we’ve heard it before, because the WSJ article links to other WSJ articles saying the same thing over the past few years.

But are young people really skipping traditional four-year colleges for other opportunities? The answer is a big fat No. And we can even use the same data the WSJ used (from the CPS) to prove it, but slice it more finely. The percent of recent high school graduates enrolled in 4-year colleges and universities in 2022 was 45.1%. That’s slightly higher than 2019 (44.4%) and is, in fact, the second highest level ever in this data, with only 2016 being higher at 46%.

So what gives? The decline that the WSJ is reporting is entirely driven by a decline in enrollment at 2-year colleges, though you would never get a hint of that in the article. You might even think it was the opposite: perhaps young people are forgoing 4-year colleges in favor of trade schools! Nope. Here’s the data.

Continue reading →

Carl Icahn Under Siege: The Predator Becomes the Prey

Scott BuchananLeave a comment

The term “investing legend” gets thrown around a lot, but in the case of Carl Icahn, it truly fits. He kicked off the modern era of corporate raiding by taking influential stakes in many companies and forcing changes to his personal advantage. In some cases (e.g., Trans World Airlines) this involved taking over and dismembering the firm, and selling off the pieces. He is considered by some measures to be the most successful “activist” investor ever. His personal wealth is (or was) on the order of $20 billion.

Icahn has rolled much of his personal holdings into a limited partnership called Icahn Enterprise L.P.  (IEP).  According to its blurb, “…Icahn Enterprises L.P., through its subsidiaries, operates in investment, energy, automotive, food packaging, real estate, home fashion, and pharma businesses in the United States and Internationally.” This partnership structure allows Icahn to cleverly avoid paying income taxes on the earnings from his enterprises. Another score for the old wolf.

This arrangement has also allowed us mere mortals to nibble on the crumbs from his table. IEP has paid a very large and growing dividend for more than ten years. Since 2019 it has paid $ 8.00 per year ($2.00 per quarter). This generous payout has made it popular among retail investors and has kept the price of IEP steady in the $50-$55 range for a number of years. This gives around a 15% yield.

It has always been understood that IEP does not actually generate enough cash to pay out $2.00 per quarter on every share, but since “Uncle Carl” owns some 82% of the shares and takes all his dividends in stock (again, to beat the taxman), it has all worked out. That is, until the past month, when IEP was the target of a “short attack” by the ominously-named Hindenburg Research. A short attack is when some outfit takes a short position in a stock, then publishes a report claiming all sorts of misrepresentation and malfeasance on the part of management, to scare the public into dumping the stock. The attacker pockets a tidy profit on their short position when the stock price tanks. Then on to the next victim.

Often, there is not much actual substance to a short attack, but in the case of IEP Hindenburg had something of a real case. Their claim is that the actual net asset value (NAV) of IEP is way, way below $50 / share, and even lower than the NAV officially reported by IEP. Hindenburg made lots and lots of other dire accusations, describing IEP’s operation as a giant Ponzi scheme. Ouch.  Also, it seems Icahn has actually lost his mojo in the past decade (he is 87), making several market bets that went sour and lost billions. Anyway, some of Icahn’s old victims are not sorry to see the former shark being mauled by tactics similar to those he once employed.

The IEP stock price quickly dropped from 50 to 30 when the short report came out, then rallied back to about 36 after Icahn gamely announced that the usual $2.00 dividend was still going to be paid (stock chart below). That is where I sold about half my IEP shares to de-risk my position (disclosure: I had bought a very small amount before the Hindenburg report).  The price then meandered around in the low 30’s for a couple of weeks, then started to slide down again.

Share price for Icahn Enterprises L.P. (IEP). Source: Seeking Alpha.

Icahn made numerous enemies in his career, including fellow corporate raider Bill Ackman. Icahn went very long on a company (Herbalife) that Ackman was heavily shorting, back in the day. One YouTube you can listen to a 2014 CNBC show where they had both called in, where they were hurling very personal insults at each other on the air.  Ackman recently piled onto the short thesis for IEP, tweeting that even after the recent fall in price, the shares were still overvalued by at least 50%. IEP shares promptly plunged another 14%, to under $20.  Icahn’s response: “Taking advice from Ackman concerning short selling is like taking advice from Napoleon or the German General Staff on how to invade Russia.”  Some things don’t change.