Should You Bet On Greenlight's Picks?
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
David Einhorn’s Greenlight Capital, a value oriented hedge fund, focuses on situations where a stock is seriously undervalued and the margin of safety is high. Einhorn is known to be very disciplined at sticking to what he is good at. He is excellent at figuring out the 3 key drivers to analyze, has courage to invest, and is active on the short side. When Greenlight analyzes a stock, it asks 4 key fundamental questions:
- Is it a great business?
- What’s the FCF with normalized margins 2 years out?
- Why is it misunderstood?
- What is the opportunity?
Let’s review Greenlight's current holdings:
Focus on Technology
Greenlight currently holds 17 stocks in its portfolio and 6 of them come from the technology sector. His top 3 tech holdings are Apple, Seagate Technology and Marvell Technology Group.
I think that the current decline in Apple (NASDAQ: AAPL) is exaggerated, even assuming some deterioration from earlier bullish expectations. I think that the market is pricing the stock as it will never release anything new and will keep selling just the iPhone, iPad and Macs. Similar to what happens in Microsoft from a valuation standpoint. The stock has been trading at a P/E of 10x for years because the market does not see material innovation besides new Windows/Office updates. Apple is not Microsoft because its innovations have not stopped in the iPad. Some fundamental concerns about demand were eased by Apple's data on first-weekend iPhone 5 sales in China, which set a new record. Sell-side analysts (Argus Research) have written that local store checks have also shown continued strong demand for Apple products.
Long-term, I believe Apple can sustain double digit revenue and EPS growth on the back of the iPhone, iPad and a possible launch of an iTV or other new products. Currently, Apple is cheap at 10x projected 2013 EPS and 8.5x forecast 2014 EPS, versus a five-year average P/E of more than 16x.
The fund also holds Seagate Technology (NASDAQ: STX) which is one of the most shareholder friendly companies in the market in both dividend and buybacks. The company trades at a very inexpensive forward P/E ratio of 5.50x. I think the stock is priced for disaster and that it may become an interesting pick to keep an eye on in 2013 as investors seek safe, undervalued, high-yield stocks.
It is important to remark that both Seagate and competitor Western Digital control almost 90% of the market share for hard disk drives. This control over the market provides significant pricing power that helps to minimize the erosion of prices for computer components resulting from Moore's Law.
The growth that Seagate will experience from the current Big Data trend will outpace the decline in the PC market. Big Data is driven by the expansion of cloud storage and enterprise IT demand. While PCs are getting replaced by tablets and smartphones, the back-end of this mobile revolution is significant demand for storage of everything from websites to content on popular social media sites. In other words, the PC secular decline is bad for companies like Hewlett Packard or Microsoft, but Seagate can balance the weakness in PC demand with the higher requirement for cloud hardware.
The fund also holds a concentrated position in Marvell Technology Group (NASDAQ: MRVL). This stock declined from $15 to $7 in 2012. From a valuation perspective, Marvell trades well below peers Qualcomm and Broadcom at 12x earnings. While it is attractive to see the confidence that Greenlight placed in this company I advise individual investors to stay away from this name. Marvell is an extremely difficult stock to analyze and should be treated with extreme caution as the company faces margin problems and lack of visibility.
In the recent report, Marvell reported in-line calendar 3Q12 results, and guided calendar 4Q12 worse than consensus analysts estimates, as wireless fell further. For Marvell, business conditions remain challenging as PC/HDD shrinkage and limited traction in cellular and connectivity weigh badly in its results. While CEO Sutardja stated ambitious goals of winning 10% global WCDMA baseband market share by year-end 2013 and dramatically improving margins, I think the market will remain skeptical.
Bullish on Autos
Greenlight holds two stocks related to the auto sector: General Motors and Delphi Automotive.
Regarding General Motors (NYSE: GM), I think that the company has not been given credit for its improved financial position post-bankruptcy. At $24.75 per share, GM trades at 7x 2013 earnings of about $3.96 per share. GM is a play on the continued recovery in the U.S. market, a significant product upgrade cycle, eventual restructuring in Europe, and continued growth in China and Brazil. In the last fund's investment letter, Einhorn explained that GM has the ability to earn $8 of (untaxed) cash earnings per share in 2014 in a mid-cycle environment considering the recent GM stock sale from the US Treasury.
Trading at just 12.6x, Delphi Automotive (NYSE: DLPH) is priced like a run-of-the-mill supplier, but has higher margins and better growth (~3-4 points faster than global auto production). According to Credit Suisse, the stock should approach intrinsic value as post-reorganization float/overhang improves considering that almost 50% of Delphi’s outstanding shares are still held by hedge funds that owned DLPH through the credit.
Greenlight is one of the best hedge funds on the street and Einhorn has made billions for his investors. When you share his views, just follow him and with conviction. If you don't, just don't go against him, your portfolio could get hurt.
martinzaldua has no position in any stocks mentioned. The Motley Fool recommends Apple and General Motors Company. The Motley Fool owns shares of Apple. 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!