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5 Stocks David Einhorn Bought -- and So Should You - views
BALTIMORE (Stockpickr) -- David Einhorn, the billionaire head of Greenlight Capital, may be best known for the stocks he hates. A notorious short seller, Einhorn and his firm are known for conducting in-depth analysis to figure out why a firm is set to fail.
In the past, that’s generated some impressive returns for the hedge fund – annualized gains well in the double-digits since the fund started in 1996 with less than one million dollars under management.
Einhorn’s short targets have included conspicuous names like Lehman Brothers, Green Mountain Coffee Roasters (GMCR), and his highly publicized spat with Allied Capital, a financial firm that the SEC ultimately found guilty of breaking securities laws. More than just shorting stocks he sees as deteriorating, Einhorn takes his case to the rest of the industry, arguing his short theses at major investment conferences like Ira Sohn and the Value Investing Congress.
But that’s exactly why investors should be paying extra attention to the stocks the Einhorn actually likes.
Today, we’ll do that by peering into his 13F. Institutional investors with more than $100 million in assets are required to file a 13F -- a form that breaks down their stock positions for public consumption. From hedge funds to mutual funds to insurance companies, any professional investors who manage more than that $100 million watermark are required to file a 13F. And with $5.5 billion in long equity alone under management (shorts aren’t disclosed in a 13F filing), Greenlight Capital certainly fits that description.
Greenlight was especially selective in the most recently filed quarter, only picking up or adding onto a handful of names, and doubling down on the technology sector. So, without further ado, here’s a look at five of David Einhorn’s favorite stocks.
Computer Sciences Corporation
It’s been a mixed year for Computer Sciences Corporation (CSC). The $4 billion IT services firm is up on the year, but it's seen a large decline in share prices since the stock peaked in February. This morning, CSC reported a first-quarter earnings beat and has gained over 15% so far on the news.
Einhorn and company certainly saw additional upside in CSC. The firm added the position to its portfolio at the start of the year, picking up 2.4 million shares worth almost $72 million at last count.
CSC is involved in everything from consulting to systems integration and business outsourcing; if it’s related to enterprise IT, it’s probably part of CSC’s service offerings. The firm is also a core contractor of IT services to the Federal Government, a lucrative business that others (especially defense contractors) are vying for right now.
While that increased competition over nearly a third of CSC’s revenue stream will pose some challenges, the firm’s entrenched position in the IT contracting space should give it an edge over rivals who are only just now starting their IT contracting arms.
Meanwhile, CSC’s commercial business is starting to catch some tailwinds as enterprise IT spending ramps back up. Pipeline bookings of around $14 billion should help to smooth out the economic hiccups that are happening all around right now.
Another new addition to Greenlight’s portfolio in the latest quarter was Expedia (EXPE), the world’s largest online travel agent. The hedge fund added one million shares to its portfolio in the most recent quarter, picking up a $33.4 million stake in the firm at last count.
Expedia provides bookings for everything from air travel and hotels to rental cars, cruises, and package tours. Hotels.com, Hotwire, and China’s eLong.com are a few of the brands under Expedia’s umbrella, in addition to its supremely popular, eponymous site.
When it comes to Expedia, it’s all about cost. The former Microsoft (MSFT) subsidiary was created to find the lowest fares for cost-conscious consumers, and that’s remained the case, even as travel became increasingly commoditized thanks to improved computer systems and contractually-guaranteed “lowest fares.” In that way, Expedia’s first-to-market status in online travel was a major key to its success; the firm will need to keep innovating on network benefits and travel content (like reviews) if it wants to keep its positioning.
International growth has been a big driver for Expedia in the last few years. Today, international markets make up more than a third of EXPE’s total bookings, a big enough chunk to materially reduce the firm’s exposure to the cyclical U.S. travel business, but a small enough chunk that it hasn’t been overly hurt by a strong dollar.
While shares have doubled in the last year, EXPE could have much further to run in 2012.
Expedia, one of the 10 Best-Performing S&P 500 Stocks in the Second Quarter, also shows up on a recent list of 3 Winning Stocks to Sell for Profits.
Seagate Technology (STX) was one of just a few existing names that David Einhorn’s firm added onto last quarter: Greenlight added 89,000 shares to its Seagate holdings, ratcheting the firm to more than 7% of the firm’s stock portfolio. Like Expedia, Seagate has had quite a year in 2012 -- shares have more than doubled since the first trading day of the year.
Seagate designs, manufactures and sells computer hard drives. That’s a business that’s proven extremely lucrative of late, as demand for storage grows dramatically. Industry trends are pushing towards technologies like cloud computing, a convenience-focused offering that typically means that data is stored in multiple locations -- both locally on a computer and then remotely on a server. That’s fueled growth demand for storage at datacenters and on consumers’ computers, two markets that Seagate provides hard drives for.
The firm has a solid balance sheet with more than $2 billion in cash that largely offsets STX’s $2.9 billion debt position. That, coupled with stellar free cash flow generation, has helped to pay out a hefty dividend, currently weighing in at about 4%.
I also featured Seagate last week in "7 Hot Stocks to Trade (or Not)."
Marvell Technology Group
There’s a lot of overlap between Seagate and Marvell Technology Group (MRVL), another position that Greenlight added onto in the last quarter. Marvell designs chips used in data storage, networking, and personal electronics, but its bread and butter is supplying control chips to hard drive manufacturers.
Even though Marvell has gotten sold off this year alongside the rest of the semiconductor industry, it shouldn’t have been. Here’s why.
Unlike most semiconductor firms, Marvell has exposure to two of the most attractive spaces in the tech sector right now: computer storage and mobile handsets. Because Marvell provides chips for both of those high-volume-growth niches, the firm stands to see its top and bottom lines expand together as it ships more chips and flattens down the large fixed costs it runs from developing those chips. More units shipped means that each chip carries a lower portion of those fixed costs, after all.
Einhorn and company added close to one million shares of MRVL to Greenlight’s portfolio in the last quarter, ratcheting the stock’s concentration to more than 5% of the hedge fund’s total holdings. At present, Greenlight holds around $290 million worth of Marvell stock.
One more name that Greenlight added onto in the last quarter is DST Systems (DST). DST is a mid-cap technology stock whose main business is providing portfolio accounting services to mutual funds -- that niche operation makes up more than two-thirds of DST’s total sales. The firm also provides printing and mailing services for the telecom and healthcare industries.
By taking care of back-office functions for scores of mutual funds, DST reduces clients’ costs, particularly at smaller funds or fund families that don’t have the benefits of paying for in-house back-office staff. And because DST’s services are so nuanced, customer stickiness is extremely high; funds can’t switch providers or move their back-office work in-house without incurring massive headaches. For that reason, DST owns close to half of the outsourced back-office market in the mutual fund world.
The firm also owns a portfolio of various and sundry assets, ranging from real estate to private equity holdings. While that positioning makes DST less of a pure-play service firm, it also gives the company access to liquidity that it can raise without selling off important parts of its business. Greenlight picked up 442,000 shares of DST in the last quarter, bringing Einhorn’s stake in the firm to $85 million.
To see the rest of David Einhorn’s plays, including a complete list of which stocks he added or sold off, check out the Greenlight Capital Portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.