Microsoft Is at Risk, Apple Is Misunderstood, and 3 Other Ideas From David Einhorn
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David Einhorn’s Greenlight Capital sent a letter to investors on Friday. Although his fund is actually underperforming the market this year (through the end of June), Einhorn continues to remain an influential figure.
In the letter, Greenlight gives its take on a number of specific stocks, including Green Mountain Coffee (NASDAQ: GMCR), General Motors (NYSE: GM), Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), and J.C. Penney (NYSE: JCP).
Einhorn remains a Green Mountain bear
Green Mountain Coffee has been a widely hated stock for years. Even today, its current short float remains well over 20%.
But there is perhaps no bigger Green Mountain bear than Einhorn. In October of 2011, he gave a presentation slamming the company, pointing out that it was poised to lose patent protection for its K-Cups in 2012, and arguing that the market for its single-serve brewer was near saturation.
When Einhorn gave that presentation, shares were trading near $100. Within a few months, they collapsed -- falling below $20, but Greenlight didn't cover. Still, the firm does not seem to regret it, writing to investors:
It is becoming clear that GMCR is approaching saturation of the single serve at-home market (brewer sales were down year over year for the first time) and competition is building from unlicensed branded and private label K-Cups (since the September 2012 patent expiration, competitors have already taken about 15% unit share in supermarkets from GMCR and its licensed partners.)
General Motors could should see earnings growth this year
Einhorn first made the case for GM back in October at the Value Investing Congress. He believed that the company was suffering from long investor memories and government ownership overhang.
Einhorn argued that GM’s pension risks were overblown, and that the company had improved its cost structure and cleaned up its balance sheet. Although its European division remains weak, Einhorn liked GM’s exposure to China -- where it is growing faster than the overall industry.
It was a good call -- GM shares have soared over 60% since last October. In fact, the auto giant just reported a quarter where it beat expectations on the back of strengthening European demand.
And while it’s been a big winner for the fund, Greenlight isn’t selling yet. In its recent letter the firm says it expects a period of “rapid earnings acceleration to commence later this year.”
Apple shares will recover
It seems that most hedge fund managers have given up on Apple. Hedge fund legend Julian Robertson, who once characterized Apple as “maybe the greatest company in the world,” recently told Bloomberg that he had given up on the company because it believed it was being poorly managed post-Steve Jobs.
But Einhorn hasn't given up. Apple remains one of Greenlight’s largest positions, and the firm expects the iPhone-maker to recover barring “operating results...[heading] off a cliff.”
In the letter, Greenlight seems to blame a faulty consensus, writing:
Early in the quarter, the concern was that AAPL was losing market share to Samsung. When Samsung’s latest Galaxy phone failed to impress, rather than re-assess AAPL’s better competitive position, the consensus story shifted to concerns about market saturation of high end phones. Sometimes, you just can't win.
Apple shares have moved higher over the last month, and the Cupertino tech giant beat expectations for iPhone sales last quarter, supporting Greenlight’s thesis.
Microsoft could be on the verge of collapse
Greenlight is particularly grim about Microsoft’s future. Einhorn’s fund sold out of the Windows-maker after ValueAct’s $2 billion purchase, and it doesn't appear that Einhorn will be buying back the stock anytime soon.
Greenlight compares Microsoft to the Yankee’s Alex Rodriguez -- a superstar years ago, but now on the verge of a lifetime ban from MLB. Writing that Windows 8 appears to be “a flop,” Greenlight thinks Microsoft is at risk of becoming a shrinking company.
Of course, the firm takes the opportunity to criticize Microsoft’s CEO Steve Ballmer. Over the years Einhorn has been outspoken in his opposition to Ballmer’s leadership, and in the letter, Greenlight refers to Microsoft having been “mismanaged for a decade.”
Ron Johnson was going to turn J.C. Penney into a penny stock
Greenlight made a killing shorting J.C. Penney in 2012, but has decided to cover. The catalyst for the investment seems to have been (now former CEO) Ron Johnson.
Though the retailer was poorly positioned, the shares rocketed in early 2012 based on overhyped promises put forth by a highly promotional CEO. Following the presentation of its strategy, the new CEO dumped a bunch of his personal stock on the market. We doubted the new strategy would succeed. We covered when the Board fired the CEO before he could turn the company into a penny stock.
That doesn't sound like a sterling recommendation for the discount retailer going forward. As Greenlight notes, J.C. Penney was in a difficult position before Ron Johnson even took over, and his time there seems to have only made matters worse.
Yet, if Greenlight is covering, the firm obviously thinks the worst is over, and that the stock's downside is limited.
But don’t take Einhorn’s word for it
Although Einhorn has had some great wins over the years (Lehman Brothers, Allied Capital) investors shouldn't attempt to simply replicate his portfolio. Last October, before presenting his GM idea, Einhorn himself urged investors to do their own work.
With that in mind, it my not be wise to blindly follow Einhorn into Apple and GM, out of Microsoft, and into shorting Green Mountain. But given Einhorn’s impressive track record and his investment acumen, his firm’s ideas should at least be considered by interested investors.
Sam Mattera owns shares of J.C. Penney Company. The Motley Fool recommends Apple, General Motors, and Green Mountain Coffee Roasters. The Motley Fool owns shares of Apple and Microsoft. 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!