Billionaire David Einhorn’s Dirt Cheap Stock Picks

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Billionaire David Einhorn likes them cheap. Among his top stock picks for the third quarter of the year, reported in Greenlight Capital’s 13F filing, are several companies that trade at single-digit earnings multiples. See the full list of stocks that Greenlight Capital reported owning. Obviously, these stocks are often cheap for a reason; whether because the market is sour on their industry or expects poorer performance at a particular company, it’s unlikely that investors are just ignoring an obvious bargain. Still, we think that it can be productive to see what value stocks Einhorn likes as a kind of screen to catch a few companies worthy of further research. Here are Greenlight’s five largest positions by market value in stocks with trailing and forward P/E multiples less than 10:

The largest position meeting this criteria was Greenlight’s second largest 13F holding by market value overall: Seagate Technology (NASDAQ: STX). Seagate is a hard disk drive and data storage services company with a market capitalization of $10 billion. This valuation places it at four times trailing earnings and five times consensus estimates for the fiscal year ending in June 2014. The stock is trading this low (and has 9% of its shares outstanding held short) even though its revenue and earnings growth over the last year have been very strong and its dividend yield is above 4%. It looks like a buy to us.

General Motors (NYSE: GM) is another ultra-value pick, and we’re less than two months removed from Einhorn’s presentation at the Value Investing Congress where he named it as one of his two favorite long stock picks. Greenlight owned 21.6 million shares of the automaker at the end of September. GM carries trailing and forward P/Es of nine and seven, respectively, as the entire auto industry and related industries are seeing low multiples. The stock is also notable for making our list of the ten most popular stocks among hedge funds for the third quarter (see the full rankings). With GM’s earnings down last quarter compared to the third quarter of 2011, we actually think we’d prefer to look at the company’s peers.

Another auto-related company that Greenlight owned at the end of the third quarter was Delphi Automotive (NYSE: DLPH), which provides electrical and powertrain components. It trades at nine times trailing earnings, with modest earnings growth expected for 2013. The stock price is actually up over 70% in the last year, even though the financial performance has not been as good: Net income was essentially flat last quarter compared to Q3 2011, and sales were actually down. This does make it a more stable business than GM, however, and potentially a better buy. Billionaire John Paulson’s Paulson & Co. owned 25 million shares of Delphi at the end of the quarter (find more stocks that billionaire John Paulson likes).

The fund reported owning about 26 million shares of Xerox (NYSE: XRX), and its low pricing (the trailing P/E is only seven) places that stock on this list of cheap Einhorn picks as well. The company is perhaps best known for its products, but also receives considerable business from services and solutions for enterprise customers. Net income was down 12% in Xerox’s most recent quarter compared to the same period in the previous year, but given how low the multiples are the company does not need to see much growth to justify the current stock price.

At eight times earnings, on either a trailing or a forward basis, $14 billion market cap health insurer Aetna (NYSE: AET) is another value stock, and Greenlight increased its stake in the company by 39% (to a total of 4.4 million shares) during the third quarter of the year. Sell-side analysts project good earnings over the next several years, and the five-year PEG ratio is 0.9. Obviously there’s considerable uncertainty as to how the government will regulate or otherwise interfere with health insurers, so the industry is something of a risk, but it’s possible that Aetna or one of its peers could turn out to be a good value at their current prices.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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