Billionaire David Einhorn’s Top 10 Positions Returned 22% YTD
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David Einhorn, founder of Greenlight Capital, is known for his profitable short selling. Einhorn shorted the Lehman Brothers more than a year before its bankruptcy. He also shorted Green Mountain in 2011 just in time to make a bundle. But, Einhorn isn’t limited to short sales.
Einhorn’s performance over the past decade is spectacular across the board. His portfolio beta is around 0.5, while his annualized net return since portfolio inception in 1996 is about 21%. In other words, investors can achieve a better-than-market return and be exposed to lower-than-market risk by investing in Einhorn’s portfolio. Even now, after the financial crisis and the rough years after that ensued, Einhorn’s performance is still strong. We found that the top 10 positions in his 13F portfolio as of the end of last year have returned a weighted average of 22% this year to date, compared to 11% for the S&P 500 index during the same period.
Table 1: Top 10 positions in Einhorn’s 13F portfolio as of December 31, 2011
The largest two positions in Einhorn’s portfolio are tech giants Apple Inc (NASDAQ: AAPL) and Microsoft Corp (NASDAQ: MSFT). Both companies beat the market since the beginning of this year. Last year, during a presentation at the Ira Sohn investment conference, Einhorn said that “Microsoft’s business has been much stronger than the average company in the S&P in the past five years”, but “Microsoft isn’t getting credit for some of its achievements and prospects.” It still seems so. The company’s double-digit growth potential is not reflected in its price. Its current P/E ratio is only 12 and its earnings are expected to grow at 10% per year. Similarly, Apple’s market price also has not fully reflected its robust growth. Its current P/E ratio is around 18 and its earnings are expected to grow at 20% annually. In February, Einhorn gave a speech at Columbia Business School, during which he commented on several stocks including Apple. According to Einhorn, though TV business has low margins, Apple will be successful even if its TV business is not.
Besides Einhorn, many of the hedge funds we track have found great opportunity in these tech stocks. At the end of last year, there were 127 hedge funds with Apple positions and 95 hedge funds with Microsoft positions in their 13F portfolios. Jim Simons’ Renaissance Technologies is also bullish about both stocks. The fund had $87 million invested in Microsoft and another $519 million invested in Apple as of the end of the fourth quarter 2011.
Another tech stock generating stunning returns so far this year is Seagate Technology (NASDAQ: STX). The stock is up 66% since the beginning of 2012, outperforming the market by 55 percentage points. As of the end of last year, Einhorn had $237 million invested in this position. A few other hedge fund managers are also in favor of Seagate, including Edward Lampert and John Thaler. At the end of 2011, there were 34 hedge funds with Seagate positions in their 13F portfolios, up from 25 hedge funds at the end of September.
We like Seagate. The company has very low multiples and strong growth prospects. Analysts expect Seagate to make $6.31 per share this year and $8.82 per share next year. The stock is currently trading at about $27 per share, which means its forward P/E ratio is only about 4.3, versus the industry average of 14. Moreover, the company’s earnings are expected to roar at about 45% per year.
We can definitely see that happening. Seagate will gain market share as well as benefit from the higher prices of hard disk drives. Additionally, Seagate bought Samsung Electronic’ hard disk drives division last year for $1.375 billion. The acquisition is expected to increase the production capacity of Seagate by over 30%, meaning that Seagate is in the right place, at the right time – even compared to its rivals. Western Digital, Seagate’s closet competitor, is also priced low with a forward P/E ratio of just 6, however its facilities in Thailand were severely damaged by a recent flood.
A few other positions in Einhorn’s portfolio with better-than-market returns so far this year include General Motors Co (NYSE: GM), ENSCO Plc, and Dell Inc (NASDAQ: DELL). Here is what Einhorn wrote about Dell in his 2011 annual letter (read the letter here):
DELL has roughly $7 per share in net cash and investments and currently earns about $2 per share (up from $1.50 in 2010). Accordingly, DELL’s P/E multiple is about 7x, and net of the cash and investments, it is less than 4x. This reflects a valuation usually associated with collapsing businesses. We expect DELL to continue to grow its earnings per share, albeit at a modest rate. Over the years, DELL has done a miserable job of allocating capital. During the dot-com heyday, when the P/E multiple was sky-high, DELL routinely plowed every available dollar back into share repurchases. After the tech bubble burst and the P/E came down to earth, it opted to hoard cash and pay fancy multiples to acquire growth. More recently it seems to have figured out that buying back stock at nosebleed prices makes no sense, but share repurchases at bargain prices can add real shareholder value. During the first three quarters of 2011, DELL repurchased 7.5% of the company and has the balance sheet to do much more.
Dell is still trading at extremely attractive multiples – the company’s current P/E ratio is 8.7 and its growth expectation is 5% per year – and General Motors is positioned even better. It has an even lower P/E ratio of 5.3 and its earnings are expected to grow at 12%. It is the most popular automobile stock amongst the 350+ hedge funds we track. There were 80 hedge funds invested in General Motors at the end of last year (check out our previous article about General Motors).
We like ENSCO too. The company completed its acquisition of Pride International last May for about $7.2 billion. Pride used to be ENSCO’s major competitor in the offshore drilling industry. The acquisition increases ENSCO’s exposure to deepwater drilling as well as its presence in fast-growing markets such as Brazil and West Africa. ENSCO has attractive valuation levels too. Its forward P/E ratio is about 10 and its earnings are estimated to grow at 16% per year over the next couple of years.
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