Digging Into Billionaire David Einhorn's 4Q Investor Letter, Part II

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What's Einhorn and Greenlight Capital betting on for 2013? In billionaire David Einhorn and Greenlight Capital's fourth quarter 2012 letter to investors he outlines his hedge fund's biggest bets. Greenlight returned 4.9% during the fourth quarter, pushing its total net return for 2012 down to 7.9% (check out the top performing hedge funds).

At the end of 2012, Greenlight's largest long positions proved to be in Apple (NASDAQ: AAPL), Cigna (NYSE: CI), General Motors (NYSE: GM), gold and Vodafone Group (NASDAQ: VOD).

After breaking down what Einhorn said carried Greenlight in 2012 (Part 1: Einhorn's 2012 Outperformers), it's time to figure out what he's betting on for 2013 (see Einhorn's newest picks). Although Einhorn doesn't outline his stake in Greenlight's largest long positions at the end of the fourth quarter, they stacked up as follows for the third quarter:

<table> <tbody> <tr> <td> <p><strong>Stock</strong></p> </td> <td> <p><strong>Rank</strong></p> </td> <td> <p><strong>% of Portfolio</strong></p> </td> </tr> <tr> <td> <p>Apple</p> </td> <td> <p>1st</p> </td> <td> <p>12.1%</p> </td> </tr> <tr> <td> <p>General Motors</p> </td> <td> <p>3rd</p> </td> <td> <p>8.1%</p> </td> </tr> <tr> <td> <p>Cigna</p> </td> <td> <p>4th</p> </td> <td> <p>5.5%</p> </td> </tr> <tr> <td> <p>Barrick Gold</p> </td> <td> <p>24th</p> </td> <td> <p>1.3%</p> </td> </tr> <tr> <td> <p>Vodafone</p> </td> <td> <p>n/a</p> </td> <td> <p>new addition</p> </td> </tr> </tbody> </table>

Apple. The big news for Apple of late has been the earnings release that showed slowing growth. This coupled with the fact that Apple is increasing capital expenditures has led to uncertainty over whether Apple will be able to continue growing at the extraordinary growth rate it has managed in the past. Apple has managed to perform better than some of its competitors, despite a declining PC market.

The increased capital expenditures will be used to make bigger bets on being able to innovate and please the market with new products. The company expects to spend around 10% of its almost $10 billion planned CapEx on new retail stores and the remaining on equipment.

The tech giant still has one of the top balance sheets in the industry with well over $100 billion in cash, short-term investments and long-term marketable securities. Cash flow generation has always excelled for the company, generating some $50 billion in cash flow from operations during fiscal year 2012, and $16 billion in free cash flow last year alone.

With the recent stock's slide, down 13% year to date, the dividend yield is up to 2.3%. Apple appears to be quite the value play despite the slowing earnings, trading at only

Cigna. Einhorn notes that his fund closed a several long positions during the fourth quarter, which includes two in the managed care sector, Humana and Wellpoint, both at a small loss. Per Einhorn's letter, he notes that Greenlight reallocated that freed up capital to other managed care organizations, possibly Cigna? That was already Greenlight's fourth largest holding at the end of the third quarter.

One of Cigna's big initiatives included its break into the Medicare Advantage market with its HealthSpring acquisition. The acquisition helps bring the healthcare company's services full-circle. Cigna's diversified product portfolio includes: Its U.S. commercial business, international business and expansion in seniors and Medicare business. The other big deal for Cigna is expanding internationally, which accounts for only around 10% of revenues.

General Motors has been seeing solid growth thanks to expansion into emerging markets, namely China and India. The car company is also expanding its dealerships in Indonesia and Thailand in an effort to further tap growth opportunities.

Compared to major competitor Ford, GM does appear to be a bit more expensive:

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Price to Earnings</strong></p> </td> </tr> <tr> <td> <p><strong>Ford</strong></p> </td> <td> <p>2.9</p> </td> </tr> <tr> <td> <p><strong>GM</strong></p> </td> <td> <p>10.5</p> </td> </tr> </tbody> </table>

However, in taking a further look, we see that GM's higher valuation is warranted thanks to the company's above average growth prospects:

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>5-Yr. Expected EPS Growth (Wall Street estimates)</strong></p> </td> </tr> <tr> <td> <p><strong>Ford </strong></p> </td> <td> <p>5.80%</p> </td> </tr> <tr> <td> <p><strong>GM</strong></p> </td> <td> <p>12.20%</p> </td> </tr> </tbody> </table>

GM also announced that it will repurchase 200 million shares from the U.S. government for $5.5 billion and lower its shares outstanding by roughly 11%, reducing the U.S. Treasury's stake in the company from 26.5% to 19%. The U.S. government also recently announced plans to fully exit its GM ownership over the next 12 to 15 months.

Einhorn's other big bet is on gold. Although he doesn't outline his favorite gold pick, Einhorn's biggest third quarter gold bet was on Barrick Gold (NYSE: ABX). Einhorn and Greenlight owned nearly 2 million shares at the end of the third quarter. The gold miner also pays a 2.4% dividend yield.

Morgan Stanley has also noted that the macroeconomic conditions remain conducive for the price of gold to go higher. The bank sees gold reaching $1,773/ounce for 2013, over 6% upside from current levels. Morgan Stanley had this to say about its gold forecast...

We expect that very low nominal interest rates, an ongoing commitment to QE3, and a below-par recovery with attendant pressure on the U.S. easing will still combine to encourage investment buying of gold, despite elevated prices.

For Barrick, specifically, the gold miner should see positive EPS growth thanks to higher gold prices and lower-cost mine production. Barrick has also diversified beyond gold, with the acquisition of Equinox Minerals in 2011, which added two copper mines. Compared to other major gold miners, Barrick does appear to be quite cheap on a price to earnings basis:

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Price to Earnings</strong></p> </td> </tr> <tr> <td> <p><strong>Barrick</strong></p> </td> <td> <p>9.6</p> </td> </tr> <tr> <td> <p><strong>Goldcorp</strong></p> </td> <td> <p>19.6</p> </td> </tr> <tr> <td> <p><strong>Yamana Gold</strong></p> </td> <td> <p>34.1</p> </td> </tr> </tbody> </table>

Einhorn noted that he had boosted his Vodafone position, believing the stock has been unnecessarily forced down on "news that just doesn't seem that bad." Vodafone has been increasing its smartphone (80% of sales) penetration across all of Europe, not to mention new initiatives in India. Vodafone is also one of the top dividend paying telecoms, with a 5.5% yield.

The enterprise segment is one of the key drivers of Vodafone s long-term prospects, leading the company to create a new business segment called Vodafone Group Enterprise. This new segment

Vodafone does hold a 45% stake in Verizon Wireless. Einhorn believes that at current valuation leaves, the stock is placing no value on its Verizon stake and that...

...with Verizon's increasing dependence on Verizon Wireless, it wouldn't surprise us [Greenlight Capital] if Verizon decided to buy all of Vodafone to gain full ownership of Verizon Wireless.

Although Einhorn managed to lag the broader market in 2012 he's betting on the likes of Vodafone and Cigna to carry his portfolio in 2013. Part 3 will take a look at Einhorn's bet on Marvell Technology (check out Greenlight's portfolio).


mhargra has no position in any stocks mentioned. The Motley Fool recommends Apple, General Motors, and Vodafone. 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!

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