Was Billionaire Einhorn Right on Apple, Martin Marietta, and More?

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Greenlight Capital has become one of the most famous hedge funds in the financial world. Manager David Einhorn is now a billionaire and has the power to singlehandedly send a stock up or down merely by revealing that he is long or short.

At a recent investment conference, a mistaken impression by the audience that he was short General Motors (GM) caused its price to immediately drop -- until it was made clear that Greenlight was actually long GM.

Einhorn provided his quick takes on a number of stocks at the Ira Sohn conference in May of this year (see our record of some stocks he did and didn't like). Here’s how these recommendations have done since then (the S&P 500, for purposes of comparison, is up about 7%):

Einhorn said that he was long Apple (NASDAQ: AAPL) and for a while this position was doing well. However, the recent correction in the stock has put it slightly down since mid May. We think that Apple currently looks like a good value at 12 times trailing earnings; analyst growth expectations imply that the stock is a screaming buy, and even though we think they might be being too optimistic, a trailing P/E of 12 can be justified with even a low growth rate. Greenlight sold about a quarter of its shares in the third quarter of the year, but Apple was still the fund’s largest position by market value (check out more of Einhorn's favorite stocks).

One of the billionaire’s short recommendations was Martin Marietta Materials (NYSE: MLM). This stock is up 22% since the Ira Sohn conference, so again Einhorn has actually missed on this pick. Martin Marietta is a $4.2 billion market cap provider of aggregates such as granite and limestone; as a result, it is dependent on activity in construction and public infrastructure. Einhorn had argued that the government would stop stimulating demand for the company’s products, which would undercut a fairly expensive valuation (read what we think about Martin Marietta right now).

A short in United States Steel Corp. (NYSE: X) has done better: that stock is down about 4%. The most recent data shows that 26% of the outstanding shares of U.S. Steel are held short, so a number of market participants seem to still think it’s overvalued. Demand for steel is tied closely to the overall economy, and the stock has a beta of 2.1; revenue was down 8% in the third quarter from the same period in 2011. Cliff Asness’s AQR Capital Management nearly doubled its stake in the company in the third quarter and we could see it being a buy if it does actually show that it is on track to meet analyst consensus for next year as the forward P/E is 14.

Einhorn also believed that increasing competition from Amazon.com (AMZN) made Dick's Sporting Goods (NYSE: DKS) a good short; Dick's has since moved very much in line with the market. Competition doesn’t seem to be too much of a problem: in its most recent fiscal quarter (which ended in October) revenue and earnings increased at double-digit rates compared to the same quarter in the previous fiscal year. Dick's was one of Citadel Investment Group’s 10 largest holdings at the end of the third quarter. However, at 23 times trailing earnings, we don’t think that it’s a buy.

A number of other investors saw this one coming as well, but we’d noted at the time that Einhorn was bearish on Facebook (NASDAQ: FB) and with the stock down over 20% from its IPO price even with the recent rally, he should get credit for that call. There have been considerable insider sales at Facebook and the valuation is very high (it trades at 42 times consensus earnings for 2013); 20% of the outstanding shares are held short. Revenue has been growing nicely, and we’d need to look more closely before deciding if shorting is a good idea even at these levels, but we’d certainly advise against buying.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in Apple. The Motley Fool owns shares of Apple, Dick's Sporting Goods, and Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple and Facebook. 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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