My Thoughts On David Einhorn Portfolio
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
My criteria for selecting a stock is also my criteria for selecting a business. First, I am looking for a business I can understand—where I think I understand its product, the nature of its competition, and what can go wrong over time. Then, when I find that business, I try to figure out whether its economics—meaning its earnings power over the next five or ten or 15 years—are likely to be good and getting better or poor and getting worse. And I try to evaluate its future income stream. And finally, I try to decide on what I think represents an appropriate price to buy the stock. In this article I analyze the holdings of top value investor David Einhorn. I analyze each company and give my opinion if shares offer potential appreciation.
Apple Inc (NASDAQ: AAPL): My opinion – Hold
David Einhorn, allocated 13.34% of his portfolio to Apple. Apple reported third quarter results below consensus expectations due to lower than expected iPhone sales. I believe that cyclical pressure is a concern. Competition (Samsung, HTC and Google) is increasing but there is no evidence that Apple’s ability to attract new customers is eroding in the near term. In my opinion negative surprise in iPhone shipments is cyclical related and greater competition from Google’s Android phones (larger screens and faster data connections) seems the iPhone to look stale more quickly as it ages past 6 month old. I expect to see greater volatility in the following earning results due to growing importance of the product cycle. A key advantage to the company is related to its operating system iOS along with its product lines. The user built a content library, applications and routines that are inconvenient to move to a competitor device. Once the user wants to replace the phone or tablet, because of existing dependence on iOS, the consumer has almost no choice to keep with Apple products, unless his is unsatisfied. Switching costs make the customer be reluctant to change the iPhone, iPad, etc to other devices.
Apple shares are trading at a P/E of 14.1 vs the industry of 10.2. The stock has traded historically at a premium (normal level of 35% premium) which seems that the company is fairly valued. Despite headwinds related to cyclical stages, I believe that the company will continue to gain traction in the near term. I will keep the shares in any portfolio.
Seagate Technology plc (NASDAQ: STX): My opinion – Hold
David Einhorn allocates 9.01% of his portfolio in Seagate Tech. Seagate Technology’s position in the Hard Drive Disc vertical is impressive and the company expects steady growth in LTAs contracts (long term agreements), which will raise stability to its revenue stream. Although the current uncertainty in the computing sector regarding competitive offerings from competitors, Seagate’s strong foothold in the Enterprise SSD (Solid State Drives) market will help to generate healthy revenue growth during fiscal 2013 and beyond, which eventually will improve margins.
Economic slowdown in Europe raised concerns its outlook for the first quarter of fiscal 2013. The company expects a steady market as well as operating expenses to remain relatively flat. It is therefore adjusting its production and inventory planning accordingly. Average selling prices are expected to remain stable as well. However, for fiscal 2013, Seagate expects 25% EPS growth on improving industry metrics and market share growth.
Seagate shares trades with a Beta of 2.38 and they have been highly volatile during the past years. In terms of valuation, shares are undervalued trading at a 3.9 P/E compared to the industry average which stands at 15x and the S&P 500 at 13.4x. Although the stock trades at a discount, and even though SSD market remains strong, this is not an industry within the technology sector that I would recommend, because the hard drive segment is highly dependent to PC demand which is likely to remain weak in the near term.
General Motors Co (NYSE: GM): My opinion – Sell
David Einhorallocates 5.39% of his portfolio in General Motors.
General Motors is benefiting from the increasing demand from emerging markets, particularly from Brazil, China and India and expects further improvement from its major expansion plan across the globe. However Europe struggling demand significantly affects GM operations. GM Europe experienced a sharp decline of 21% in revenues to $5.89 billion in the second quarter of 2012 and an EBIT adjusted loss of $361 million compared to a profit of $102 million in the last quarter. Furthermore, the European branch, Opel, expects to report operating losses in 2012 due to fewer than anticipated car sales. In order to balance this shortfall, GM has recently joined and alliance with PSA Peugeot Citroen. This venture will produce cost savings around $2 billion. The strength of the US Dollar against developing economies currencies as well as unfavorable economic conditions globally, especially in Europe, are major concern which are affecting the company sales and margins.
Since the US Government holds a significant ownership stake (32%), shareholders should be aware that the US Treasury could at some point in time sell to the market the entire or a portion of the stake. I think GM shareholders will eventually be rewarded, however, it should take time. This company will be most suitable for patient investors. The company is trading at discount to the peer group (P/E of 6.3 vs Industry 10.3).
Other stocks that Greenlight Capital holds
David Einhorn holds 4.53% of his fund in Marvell Technology Group (NASDAQ: MRVL) and 4.44% in Cigna (NYSE: CI).
My opinion is that Marvell is a sell and Cigna a hold
From the last earnings results, Marvell Technology management reported that recent uncertain macroeconomic conditions have hampered demand for the firm’s chips. As a result of slowdown in global PC demand, sales of HDD came in below expectations. In the mobile segment Marvell was hampered by slowing demand from its key customer RIMM as well as softer chip demand from the Chinese industry. RIMM continues to lose market share which has raised concerns to Marvell about the demand for chips. Although it has many growth opportunities in long term, the company faces a variety of headwinds such as fierce competition. I prefer to stay on the sidelines.
Regarding Cigna, the company has reported strong results outpacing consensus. Consolidated revenue in the quarter came in at $7.5 billion, up 35% YoY. Premiums and fees increased 40% YoY to $6.7 billion, primarily due to higher premiums in the Health Care as well as international businesses segments. The company is well positioned with a diversified portfolio of product lines and expects to encounter attractive growth prospects. This may include the expansion in Senior and Medicare business. The acquisition of HealthSpring made the company a big player which is likely to drive growth in fiscal 2012.
Insurance sector is heavily regulated, both at the state and federal levels, and regulatory changes could have negative effects on Cigna's business. Cigna has more than $20 billion in investments, backed primarily by the float from life, disability, and health insurance premiums. Most of this money is invested in fixed-income securities, which could lose value if credit spreads widen. The company trades at a very low P/E of 7.6x, which is a 22% discount compared to the industry average of 9.7x. However, in terms of P/B, the shares trade at 1.4x, a substantial premium to the 0.8 average.
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federicoflom has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
