Insight From Einhorn’s Latest Picks

Greenlight Capital, the hedge fund run by famed investor David Einhorn, just came out with their quarterly letter to share holders. He had interesting comments on some positions:

Apple (AAPL)

Apple is Greenlight’s largest position. Greenlight bought back the Apple shares it had sold in the third quarter. In my last article, I advised readers to stay on the sideline on Apple shares. Obviously, Apple took a big hit today after reporting quarterly results yesterday. Even at $450, I would continue to be cautious and stay on the sideline. If it hits near $400, I will most likely initiate a position, but as I mentioned before this stock does not have huge upside. So, it makes sense to be cautious. 

General Motors (GM)

General Motors is one of Greenlight’s top holdings. He is still bullish on GM even after the recent run up. I agree and am still long GM. It has multiple catalysts:

  • Buy back even more of its shares from the government. They already bought back 11% which should increase eps.
  • Lower pension risks further. It announced last year that Prudential would administer and pay $26 billion of its pension obligations at a cost of $3.5 to $4.5 billion to the company. It can use the excess capital to move more of its pension obligations to Prudential.
  • United States vehicle sales return to a more normalized level as the economy picks up.
  • Europe economy picks up.

Marvell Technology (MRVL)

Marvell used to be one of Greenlight’s top holdings. However, the stock has been one of his worst performers. Earnings and revenue have been down. Recently, a jury awarded Carnegie Mellon University (my alma mater) $1 billion for patent infringement. Einhorn thinks that award will be reduced and the market is also discounting a new product cycle. 

I am avoiding Marvell because I am not confident that the patent infringement award will be reduced and do not understand its products well enough to make an investment.

Vodafone (VOD)

Vodafone is by far the most interesting of Einhorn’s stock picks. According to Einhorn:

  • It pays a 7% dividend.
  • It owns 45% of Verizon Wireless.
  • It trades at 12 times cash earnings excluding the Verizon Wireless ownership.

This definitely seems like a great investment. I will look more into Vodafone this weekend and share my findings.

Here is the letter.

Disclosure: I am long GM.

Apple Broken Down

Apple White iPhone

Let me preface this article by saying, I am a fan of Apple (AAPL) products. I own an iPhone, a MacBook Pro, and an iPad Mini. So, I am a bit biased. However, I will be objective as possible when talking about Apple as an investment. 

Apple has been the subject of heated debates from bears and bulls. Let’s first look at the bullish arguments and then the bearish argument. 

Bullish Argument

  • Apple’s valuation is cheap. At around $500/share, it has a market capitalization of around $475 billion. It has a huge cash cushion of around $120 billion. It trades at around 10 times 2013 earnings estimate. This is cheap for a company that has been growing earnings 70% a year over the last 5 years (Source: Yahoo Finance)
  •  The biggest contributor to income, the iPhone, is still the best smartphone in the market.
  • Apple products command premium price and margins.
  • Apple just had a major upgrade cycle, iPhone 5 and iPad Mini just came out.
  • The smartphone revolution is still in its infancy. According to the Business Insider in September, “There are an estimated 6 billion mobile handsets in the world, and only about 1/5th of them are smartphones.”
  • Apple is still not supported by the biggest telecommunications network in China, China Mobile.
  • Apple is working on the next big thing, Apple TV. This could be next catalyst for income and stock price.
  • Once users are in the Apple ecosystem, they tend to buy more products and apps. According to Fortune magazine, Apple is projected to generate $22 billion in App store revenue by 2016.

Bearish Argument

  • Yes, Apple is cheap based on past earnings growth. However, future earnings growth is questionable. It is hard to grow a company earning $40-$50 billion a year much less maintain it. A lot of the cash is overseas and Apple would have to pay taxes to bring it to United States.
  • It is debatable whether iPhone is still the best smartphone. Samsung is catching up or has caught up. The different between iPhone is much smaller than what it used to be a couple of years back.
  • Although, Apple’s premium price and margins have lasted in the pc industry, the smartphone industry is different. It’s a different OS (Windows vs Android) and different manufacturers. Unless, Apple makes much better smartphones, the margins will not last.
  • Apple just had major upgrade cycles, but the changes were not revolutionary. Apple’s products are not matching their hype anymore. The first quarter should be huge, but what about the rest of the year.
  • There are a lot of people without smartphones. However, most of the are not the high income Apple customers. A lot of these customers are in India and China where customers are a lot more cost conscious and will not pay a premium price for Apple products.
  • China Mobile and Apple have been working on a deal for years. Even if the deal goes through, China Mobile has a lot more leverage than other telecommunications networks and the deal will not be as favorable to Apple as with other partners.
  • First, Apple TV has to come out. Once it does, it has to be a success. Even if it is a success and say the product is worth $100 billion. That will only equate to about 20% of Apple’s current worth.
  • A projection of $22 billion generated by the App Store in 2016 is nothing especially when you consider that Apple makes 30% of that revenue. If you factor in taxes, the net income from the App Store comes out to less than $5 billion. This is nothing for company worth $500 billion.

My Take

I believe that people who are predicting Apple to fall below $300/share are foolish. I also believe that people who are predicting Apple to go above $1000/share are foolish.

I see Apple now as a value stock that will trade around the $500 range. To me it does not make sense to buy Apple because its market capitalization is so big. It would take tremendous growth and innovation to move a company worth $500 billion. I have a hard time seeing how Apple can move much higher unless:

  • They maintain their margins and gain market share in the smartphone market.
  • Apple TV is somehow a $100 billion+ product.

Having said that I don’t think there is a huge downside to the stock. I do not see it dropping below $400/share. The $120 billion cash cushion should increase to over $150 billion by the end of fiscal 2013. This should provide downside protection.

Disclosure: I do not own Apple stock.

Liberty Media Spinoff Details

Here are the details of the Liberty Media (LMCA) spinoff of Starz:

  • The spinoff is actually all of Liberty’s assets except Starz.
  • January 14th is the ex-dividend date.
  • The spinco will trade temporarily under the symbols LMCAD and LMCBD on January 14th. It will trade under permanent symbols LMCA and LMCB on January 22.
  • Prior to the spinoff, Liberty will change its name to Starz. The spinco will change its name to Liberty Media Corporation.
  • Starz will trade under the symbol STRZA and STRZB on January 14th.
  • Starz will be interesting after the spinoff because it has put itself on the block for sale.

    Year end review

    Happy new year! I took some time to disconnect over the last two weeks and enjoy the holidays. For the first post of 2013, I thought it might be a good to review all the picks from the last 3 months to see how I fared.

    AIG (AIG)

    AIG is still one of my top picks. It is up about only $2 from the price I paid for the stock. However, I feel it still has significant upside. Mainly all the arguments I made previously still apply:

    • It trades at half of book value.
    • The government completely sold AIG shares at the end of 2012. It now only holds warrants in the company.
    • AIG sold its stake in AIA. It also has agreed to sell a majority of its stake in ILFC.
    • The company can now focus on its core insurance operations and improve its return on assets.

    Dean Foods (DF)

    I sold Dean at a little bit of a loss. I still think Fresh Diary Direct segment is undervalued. However, the volatility of Whitewave was too much for me to take. I think the best way to play Dean is to wait for them to distribute the Whitewave shares and buy it before the distribution date if the current prices remain as they are.

    General Motors (GM)

    GM is one of my biggest winners. It is up nearly 50% for me. The government sold off 200 million shares of its stake in the company to GM recently. This should have a positive impact on EPS. If the economy improves in US and Europe and vehicle sales return to a normalized state, earnings could easily be over $5 over the coming years. Also, it is slowly removing the overhang of the pension liabilities. This could also be a big boon.

    With the stock to almost $30, I might cut my position in half and book some profit. The auto industry is very capital-intensive and very competitive.

    Orchard Supply Hardware (OSH) & Sears Hometown & Outlet (SHOS)

    I have written a lot about these two Sears spin offs and I am short both. As I mentioned in my previous articles, I am convinced Orchard will go under. So far, it has been a very profitable short for me. I am not 100% convinced on Sears Hometown, so I only have a small short position there. Both of these plays are a bit risky, since they are cheap on a revenue multiple basis. Sears Outlet is a wild card for SHOS. If it can grow that successfully, the stock may have upside. I have no faith in the Sears Hometown business as it has had negative same store sale numbers for years. I know a lot fellow financial bloggers are long SHOS and I am open on seeing their analysis. So far, I have been wrong as SHOS. It has bounced nicely from $30 to $35 recently.

    Xerox (XRX)

    I bought Xerox around $6.50. The stock is around $7.20 today. Nothing fundamentally has changed about the company since I wrote the bullish case. It still trades at a significant discount to FCF and has increased its dividend. I still think there is significant upside.

    Genie Energy (GNE)

    Genie was a quick arbitrage trade on its offer to exchange common shares for prefered shares. I booked little less than a 10% profit on the trade. I still think there may be an opportunity on this type of trade in Genie in the future. Nobody will exchange the common for the preferred as the common is trading higher than the preferred.

    Pandora (P)

    I have a small short position in Pandora. So far, it has not been a good trade as the stock has shot up from $8 to $10. I continue to believe that this company will not exist in the future. It really has no barriers to entry, no competitive advantage, and is not profitable. Obviously, a lot of Pandoras profitability depends on the outcome of the Internet Radio Fairness Act. However, there is no doubt that there will be more competitors in this space in the future. I will keep this short position.

    Susser Holdings (SUSS)

    Susser is up about a $1 from what I bought it at. It may take some time for this stock to go up. However, it should be able to expand a lot faster after the spin-off of SUSP. I have a small position and will keep that position.

    Others

    I also missed out in some of my other bullish calls such as Facebook, Lumos Networks, Nacco Industries and Einsteins. I wrote a bearish case on Western Union, but the stock has been up since then. I still believe in the bearish case. I believe that Western Unions biggest competitor Moneygram will have a tough 2013 due to Western Unions price cuts. I will be looking to short in 2013.

    DIsclosure: I own or am short most of the positions