David Einhorn’s Top 3 Stock Picks
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As the founder of the mega-sized hedge fund Greenlight Capital, David Einhorn has around 5 billion reasons why individual investors should take note of his tactics. Since Greenlight’s inception in 1996, Einhorn has averaged a 21.5 percent return each year, despite being one of few money managers not to use a leveraged portfolio. Just as we mentioned in this article, there are plenty of reasons why investors should follow the actions of the world’s most successful hedge fund managers, and Einhorn is definitely elite. With a strong foundation in value investing, Greenlight’s strategy also has a dash of George Soros and Carl Icahn in it, as Einhorn has a penchant for short selling and holding activist stakes in companies. Now, while these two strategies may be alluring (as seen here), they are impractical for the common investor. Instead, it is best if emulators stick to the fund manager’s long holdings. Below are the top three stocks in Einhorn’s portfolio, as of his most recent SEC filing.
Apple, Inc. (NASDAQ: AAPL)
Comprising over 15 percent of his portfolio, Apple is far-and-away Einhorn’s largest holding. Aside from having ridiculously bullish potential in China, as we’ve so passionately mentioned before, Apple is a company with the unique combination of locomotive-like growth at a persistent undervaluation. Since the recession, the tech giant has averaged a 42.4 percent revenue growth per year, while increasing earnings 59.8 percent per year. These are video game numbers. You hardly see them in any company, let alone one with a market cap flirting with $600 billion. Focusing on EPS growth, primary competitors Google (NASDAQ: GOOG) at 30.8%, and Microsoft (NASDAQ: MSFT) at 12.9%, can’t even hold a candle to Apple.
From a valuation standpoint, shares of AAPL are trading at a P/E ratio (14.8X) below GOOG (17.6X) and its own 5-year historical average (21.9X). Now, this does not mean that investors are bearish on Apple; quite the contrary, the stock has returned over 50 percent in 2012 alone. What it does mean, is simply that the bulls have yet to “catch up” with the company’s otherworldly earnings growth – a splendid situation indeed. Going forward, the Street is expecting Apple to finish 2012 with an EPS of $46.89, up an astounding 46 percent from 2011. One year ahead, these earnings estimates jump another 16.4 percent. Assuming that this consensus holds, fairly valued shares of AAPL should flirt with $700 by the end of the year, reaching $800 by the end of 2013. The stock currently trades in the $610 range.
Seagate Technology (NASDAQ: STX)
Holding the number two spot in Einhorn’s portfolio, Seagate Technology has been quite the bull this year, returning nearly 55 percent in capital appreciation. Considering the fact that shares of STX represent around $400,000 of the money manager’s total portfolio, this return is clearly significant. While individual investors probably don’t hold quite the same amount of dough, any return in this arena is no doubt highly sought after. Regarding Seagate, much of the stock’s growth can be attributed to the company’s outstanding third quarter earnings of $2.48 a share, compared to analysts' estimates of $2.11. Looking to the remainder of this year, STX is expected to finish with an EPS of $6.87, while ending 2013 at $8.08 a share. If this consensus holds, it would mark a near tripling of the company’s bottom line from last year, which would logically have a positive effect on its stock price.
Shares of STX currently trade at a P/E ratio (5.7X) below the data storage industry’s average (13.9X) and its own 5-year historical average (9.2X). When growth is factored into the equation, we can see that the stock sports a PEG ratio of 0.4; typically any figure below 1.0 signals undervaluation. Assuming that Seagate hits its year-end earnings target, we should see a breakout above $35, with upside of $55 if it is able to regain its historical valuation. The stock currently trades in the $25 range.
General Motors (NYSE: GM)
Last but certainly not least, General Motors is Einhorn’s third favorite stock, as it makes up nearly 7 percent of his total holdings. Since its reemergence from bankruptcy two years ago, the “new” GM has been a downer, losing 42.1 percent of its value. This year, shares have been in the red, as a weakening eurozone has zapped the company’s bottom line. In the first quarter, GM reported earnings of $0.60 a share, down from the $1.77 it reported in Q1 of 2011. Despite this decline, analysts are still expecting the company to finish 2013 with an EPS of $4.36, which would be a 12.4 percent jump from last year.
Interestingly, this year’s earnings are expected to decline slightly, which may explain why the stock is trading at a P/E (4.5X) below the auto industry average (8.2X). Still, if the company is able to remain on track to hit 2013 earnings, fairly valued shares should rise to the $35 territory. The stock currently trades around $19, making a double-digit return over the next couple years a very real possibility. It is this potential that Einhorn is likely considering. Now, WealthLift’s Sentiment Index rates GM as a moderate buy, with around 70 percent of the community’s users placing an “overperform” rating on the stock.
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Fool blogger Jake Mann doesn't own shares in any of the companies mentioned in this article. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, General Motors Company, Google, 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.If you have questions about this post or the Fool’s blog network, click here for information.