Billionaire corporate raider Carl Icahn is no fool. When he makes his multimillion dollar investments in companies, he’s done a lot of homework and has a high degree of confidence that he stands to profit.

During the summer of 2011, he loaded up on shares of WebMD (Nasdaq: WBMD), which I discussed in November. (He owns close to 10% of the company now, a stake worth about $156 million.)

Icahn knew that this company possessed had a very strong web presence in one of its most lucrative niches: health care information. And he figured there were ample paths to unlock value when he bought shares last year.

At first blush, Icahn looked brilliant, as shares of WebMD, which had fallen from $55 in April 2011 to under $30 by early October, soon perked up. Shares steadily rebounded to nearly $40 in early 2012 after WebMD announced plans to put itself up for sale.

One small problem: the company appeared to move too hastily. Potential suitors were looking at the company’s business model at a time when business continued to soften. (As I noted in November, drug companies have slowed their ad spending in recent quarters due to a series of patent expirations and heightened Food and Drug Administration scrutiny.) Though we’re not privy to those internal discussions, the potential suitors likely saw the recent (and ongoing) quarterly weakness as an opportunity to put in lowball offers for the company. WebMD’s board issued an emphatic “no thanks” and figured it was wiser to simply take down the “for sale” sign and refocus on the business. For that to happen, new management needs to be brought in, as CEO Wayne Gattinella was let go.

Investors freaked out. Shares plunged nearly 30% on Jan. 10 to a two-year low, levels even below where Carl Icahn bought in. What did he do in response to this setback? He picked up even more stock, acquiring 545,000 shares (worth $14.3 million) on that very same day.

At first glance, Icahn looks clearly mistaken. He had been buying up shares because WebMD is a solid growth story, seemingly poised to grow in tandem with the rising number of senior citizens that are voracious consumers of health care information.

To be sure, 2012 will probably be a challenging year. Sales are likely to fall from around $550 million in 2011 to around $520 million in 2012. That’s not characteristic of a growth stock.
 
In reality, WebMD is experiencing a natural speed bump on what is still a long-term growth trajectory. The company has become such a vital resource for patients seeking health care information — drug makers need to stay in front of consumers with their marketing messages, and doctors need to move their practice into the electronic age — that it will remain a very strong player.

Icahn knows WebMD will be back in favor again as soon as the quarterly trends turn back up. And he knows that major media and Internet-focused companies still see the company as a prized asset. Of course, these recent events imply that WebMD may take at least several quarters to regain sales momentum. It’s unusual for Icahn to place more funds into an investment that requires patience. Of all the major investors such as Warren Buffett, George Soros, Bill Gates and the like, Icahn has the shortest time horizons when it comes to looking for a payoff.

The series of quarterly shortfalls imply that management underestimated the depth of current industry pressures. Those pressures are unlikely to abate quickly, but it’s important to remember that this has happened to WebMD several times before, and the company has always emerged stronger. Icahn needs to be patient, but you can bet WebMD’s board is well aware of the need to do whatever it takes to get this stock moving. Carl Icahn is watching.

Risks to Consider: If WebMD has indeed found it harder to keep growing at a solid pace, and this turns into a lower-growth business model, then shares may stay range-bound for an extended period.

Action to Take –> Though this has turned into a challenging period for WebMD, Carl Icahn is clearly on to something here. Shares were above $50 last spring not because of a projected P/E ratio or other such metric, but instead because investors realized that this has become a very important piece of real estate on the Internet. I doubt that shares will be back at $55 any time soon, but would not be surprised for a bidder to emerge with a $35 to $40 a share offer — and for the company to accept that offer. That would be a gain of about 25% from current levels.

With more than $1 billion in cash, look for the company to perhaps announce a buyback soon, which should support shares. If so, then this becomes a stock with solid downside and considerable upside.

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