Institutional investors have significant advantages over individual investors due to their talented employees and substantial resources. Individual investors can certainly succeed in managing their own portfolios but they are often at a disadvantage. Fortunately you do not need millions of dollars in order to see the holdings of top investment managers thanks to SEC requirements. Note for simplicity purposes that the investment manager and the fund names will be used interchangeably in this article.
Institutional investment managers that operate in the United States and manage over $100M in qualified assets are required to file Form 13F within 45 days of the calendar quarter, which includes details of long holdings. Short positions are not required to be reported on Form 13F. Eligible securities can be found on the SEC website but generally include exchange traded equities, options, closed-ended investment companies, and some convertible debt.
It is very prudent to consider the holdings of top portfolio managers who have significant access to top executives and other resources; however, this information should not be a substitute for your own due diligence. Additionally, these holdings are approximately sixty days old and may have changed significantly since the last reporting date. This type of information is a great starting point for new holding ideas and to see how a professionally managed, diverse portfolio is constructed.
One such leading portfolio manager is David Einhorn who is the founder and president of Greenlight Capital, LLC. ("Greenlight"), "a value oriented, research driven investment management firm." Einhorn came to fame with his famous critical speech of Allied Capital (which he has now written a book about) and he has a delivered a string of correct calls that have come to fruition. Einhorn is a generally fundamental investor who performs deep due diligence on the financial statement of companies to get insight into the company's value. This leads to the numerous long positions detailed in the Form 13F as well as many short positions such as Green Mountain Coffee Roasters (GMCR). Utilizing an Einhorn fundamental analysis on Green Mountain I came to the same conclusion that you should avoid the stock. GMCR is a classic Einhorn investment as he started with a fundamental analysis and complemented it with a review of current events. In essence, a company better have a good reason why it is trading at a higher or lower P/E multiple than the market. By combining these approaches Einhorn has been very successful at identifying both under- and over-valued companies before the broader market. I follow Einhorn's holdings because he has a proven track-record and an investment theory that aligns well with my own. Below I will provide my own insight into Greenlight's top five long holdings and see if you should emulate the chosen strategy.
Apple, Inc. (AAPL): 12.1% of Portfolio
Apple is Einhorn's largest position by a very wide margin and is weighted 3.6% more than the next closest holding. Einhorn has been reducing his weighting in Apple which is understandable given its emphasis in the portfolio. Apple was hitting all-time highs and Einhorn smartly took profits. Not only did he lock-in gains but he prevented his Apple holding from dominating the portfolio. I fully expect Einhorn to have purchased additional Apple on its recent dip as he is a huge Apple bull. In July of this year he stated that he believes "the stock is very, very substantially undervalued." Apple was trading around $615 when he made his comments despite rising earnings so now he would likely consider Apple to be very, very, very substantially undervalued.
I have been very bullish on Apple and I believe that we have seen the bottom in the stock after it plummeted to $505. My previous articles provide far more color on Apple but the executive summary is that Apple is a very attractive value at these forward P/E levels (ex-cash is approximately eight) while Apple still maintains very strong barriers to entry that will prevent competitors from taking substantial business.
Seagate Technology PLC (STX): 8.6% of Portfolio
Seagate is one of the leading computer hard disk drive ("HDD") manufacturers that operates in the magnetic disk market. Magnetic disks are the primary storage medium for digital media and are used in computers, data centers, and other storage devices. Consumers may know this as where you store your files, pictures, and music on your computer but more personal computers are relying on solid state drives. Solid state drives are relatively new and are much more expensive than traditional HDDs; therefore, business still rely heavily on HDDs for their data mining storage needs. I always like to reflect on a quote from Seagate CEO Steve Luczo, Eric Savitz explains why HDDs are not going to lose relevance anytime soon:
"Five years ago, Luczo notes, the industry shipped 100 exabytes of data storage a year. In 2011 the total was 400 exabytes. By 2015 or 2016, he thinks, the total will hit a zettabyte. A zettabyte is equal to all the data that's been digitized from 1957 through 2010," he notes. By 2020, he contends, that total will jump to somewhere between 7 and 35 zettabytes. He's not worried about flash. Instead he fears the opposite: that within a couple of years there will be a shortage of magnetic-disk media. [Emphasis added]
I am long Seagate's primary competitor, Western Digital (WDC) and I believe concerns about the market are overstated. Both WDC and STX sell-off on any personal computer downbeat news but this is increasingly a cloud computing story. Hard disk drives may be losing popularity in the face of solid-state drives, but until solid state becomes more cost-effective, Seagate will be able to print money with its legacy hardware. Einhorn made such a significant purchase of Seagate due to its strong earnings potential in the near-term and robust balance sheet that facilitates share repurchases. I personally prefer WDC due to its stronger financial position and market leadership but STX is cheaper (P/E of 3.6 vs. 4.5) and offers a much higher yield (4.8% vs. 2.9%). Technology companies are generally not the highest dividend payers, but the hard disk drive business is relatively mature for the tech industry, so there are more opportunities to return proceeds to investors.
General Motors Co. (GM): 8.2% of Portfolio
Greenlight's top two holdings are in technology but now we shift gears and focus on General Motors. After a proud 100 year history GM became a casualty of the Great Recession and was forced into bankruptcy reorganization in 2009. As part of the auto bailout the United States government acquired a significant equity position in GM and approximately one-quarter of GM's equity is owned by the U.S. government today. As part of the bankruptcy all of GM's shareholders were wiped out but GM went public in late 2010. General Motors lost the title of the world's largest automaker by volume in 2008 to Toyota but recently reclaimed the title last year with nine million motor vehicles sold in 2011. As you know GM and most companies tied to the auto industry are quite vulnerable to a weakened economy; however, there are short-term catalysts which could support the industry. One of GM's greatest weaknesses is Europe but Einhorn believes that European operations could break-even in 2015. Einhorn believes that the market has discounted GM too deeply and the stock is finally cheap - with a forward P/E of 6.7 it would be difficult to disagree.
I have been trading General Motors since I first recommended the stock in late 2011 and the stock has rebounded modestly over the past year to the tune of 24% appreciation. A closer inspection of the chart reveals that GM is a quite volatile stock and is a great stock to trade as it has relatively predictable price movements off of news and generally sticks a tight trading range. GM has recently broken out of its historical range and is now relatively expensive above $25. GM is not the best company around and still faces significant headwinds; however, I am comfortable owning the stock when its P/E is below ten. I would consider selling GM around $26 and then repurchasing on pullbacks.
Cigna Corporation (CI): 5.6% of Portfolio
Cigna is one of the largest health service companies in the United States that offers integrated health plans and services to a variety of customers. Cigna has approximately 14M medical customers and another 40M other customers (behavioral care, dental, and pharmacy) in the United States. Cigna closed the acquisition of HealthSpring in January to expand its footprint in the Senior/Medicare market. Greenlight purchased Cigna in July to capitalize on possible revisions to Obamacare with a Romney victory. "There is the additional unpriced upside in the possibility that the election changes the political landscape, resulting in a possible modification or repeal of Obamacare." This was a sizable position for Einhorn so I am sure that he did not purchase Cigna on pure speculative purposes but sees it is an attractive value. If Einhorn entered into this position believing that it would appreciate following modifications to Obamacare then he has likely reduced his weight in the position following Obama's reelection.
Market Vectors Gold Miners ETF (GDX): 5.4% of Portfolio
The Gold Miners ETF seeks to replicate the performance of the NYSE Arca Gold Miners Index which tracks worldwide gold miners of a variety of sizes. GDX holds 31 securities as of October 31, 2012 with an emphasis on Canadian large cap miners. Largest holdings include Barrick Gold Corp (ABX), Goldcorp Inc. (GG), and Newmont Mining Corp. (NEM). These are all high quality gold miners is a great way to gain exposure to the sector. Expenses are average at .52% and the fund yields .31%. Barron's recently had a nice article on gold miners where author Michael Kahn stated "For now, gold miners seem to be priced at a level where the downside risk is limited to perhaps 8% to test the intermediate-term trendline drawn from last year's peak. The upside potential to that same 2011 peak is more than four times as great. In my book, that's a good risk/reward tradeoff for any investor."
Before I close I would like to touch upon two smaller interesting long positions in the portfolio that came to my attention. Greenlight prefers to go long using equities rather than options or debt but there are always exceptions. This is consistent with most fundamental theory as it is easier to just pick a stock's direction without having to worry about timing. At September 30 there was one long option, a Chipotle Mexican Grill (CMG) Puts, indicating that Einhorn believes the stock is heading lower. I personally agree with Einhorn when I recommending selling the stock in October. The stock has declined approximately 13% since the valuation date so it is very likely that the puts have appreciated substantially. While only .3% of the portfolio, the leverage inherent in options could make this a solid winner for Einhorn.
Another fascinating investment for Greenlight is the Knight Capital Group (KCG) 3.5% notes which likely arose when the Knight was on the brink of failure in August. The $15M note is insignificant for Greenlight but shows that the firm is always active in seeking out attractive investment opportunities. This is exactly what you want to see from a prospective investment manager. Note that high-frequency market-maker Getco Holding made an offer to acquire Knight Capital Group on Wednesday.
Please refer to the summarized Form 13F below for all holdings.
Please refer to profile page for disclaimers.