David Einhorn is one of the foremost hedge fund managers in the world. He is an activist investor, meaning that when he buys a stock for his fund, Greenlight Capital, he sometimes buys a stake large enough to give him a say in the way the company is ran, so he knows a thing or two about how a company should be run as well as what makes a good investment. Einhorn’s investment advice carries so much weight in the financial world that when he spoke out against Green Mountain Coffee Roasters (GMCR) at the Value Investing Congress on October 17, shares in the company began to fall almost immediately (see the story here) and so did shares in companies that had a similar profile to Green Mountain, like Sodastream (SODA) (read about it here).
In 2011, Einhorn’s Greenlight Capital returned roughly 3%, beating the S&P 500’s performance of 1.9% and outpacing the average hedge fund, which lost around 4%. Greenlight Capital returned around 20% annually since its inception in 1995. With numbers like this, David Einhorn is a hedge fund manager that we pay particular attention to. On February 14, Einhorn filed a 13F for the fourth quarter 2011. In it, he reports having 129 positions with a collective value of $5.23 billion as of the end of December, up from 123 holdings, over $4.67 billion at the end of the third quarter.
As of the end of the fourth quarter, Apple (AAPL) was Greenlight Capital’s largest investment. The fund had 1.46 million shares, or roughly $592.80 million invested, in the company at the end of December, or roughly 11.3% of its 13F portfolio. This represents an increase from its position in the company at the end of the third quarter, when Greenlight held just 1.31 million shares in Apple; the position was valued at $500.76 million, or 10.71% of Greenlight’s portfolio, at the end of September.
We can see the reason for the increase. Apple is a great stock. FBR Capital initiated an outperform opinion on January 20. Mizuho followed suit a few weeks later, initiating a buy opinion on February 9. Apple has plenty of forecasted upside – it opened trading on February 16 at $491.31 on a mean one-year target estimate of $569.51 (range $270 to $700) – and it is priced low at 10.46 times its forward earnings. We believe Apple will deliver double digit returns annually over the next three years.
Looking at Apple competitor Hewlett Packard (HPQ), the attractiveness of an Apple investment is even more clear. Hewlett Packard opened trading on February 16 at $28.94 a share with a mean one-year target estimate of just $30.29. The company pays a 48 cents dividend (1.70% yield) and is priced lower relative to its future earnings, with a forward P/E of just 6.67. We don’t think the consensus estimates for HPQ are accurate and are influenced by the company’s large losses last year. Mega-cap technology stocks are undervalued, including Microsoft, and this is an opportunity to buy them while they are still cheap.
Microsoft (MSFT) was Greenlight Capital’s second largest position at the end of the fourth quarter. It owned 15.17 million shares in Microsoft at the end of December, with a total value of $393.84 million. The number of shares remained unchanged from the end of the third quarter, but the value of the position did increase from the $377.61 million it was worth at the end of December. Microsoft opened trading on February 16 at $30.31 a share on a mean one-year target estimate of $31.88 (range $20 to $36). The company also offers an 80 cents dividend (2.60% yield) and is priced at just 10.44 times its forward earnings. Compared to another software company like Oracle (ORCL), Microsoft is priced much lower. With a forward P/E of 11.16, Oracle is priced higher relative to its forward earnings than Microsoft. Oracle does, however, offer greater upside – it opened trading at $28.16 with a mean one-year target estimate of $33.21 – and it pays a dividend of 24 cents (0.90%), but it does have the same growth expectations. Analysts expect Microsoft’s earnings will grow by roughly 10% per annum over the next five years; they estimate an earnings growth of just 12% for Oracle. Both companies are in decent positions, but we agree with Einhorn. Microsoft is the better investment.
In the fourth quarter, General Motors (GM) moved from Greenlight Capital’s fourth largest position to its third largest. The fund owned 19.01 million shares in the company, valued at $385.32 million, at the end of December, compared to the 15.17 million shares, or $377.61 million, it had in the company at the end of the third quarter. General Motors was trading at $25.29 a share when the markets opened on February 16, and had a mean one-year target estimate of $32.53 a share (range $20.06 to $45). General Motors doesn’t pay a dividend, but it is priced low, at 7.12 times its forward earnings. The combination puts General Motors in a better position than Ford Motor Company (F). Ford has less upside – it opened trading on February 16 at $12.38 a share with a one-year target estimate of $15.93. While Ford does pay a dividend (of 20 cents or 1.60% yield), it just isn’t enough to make up for the lack of upside, especially given that Ford is priced slightly higher relative to its future earnings, with a forward P/E of 7.46. We are optimistic about General Motors and think that Einhorn’s bullishness on the company will pay off.
