By Marshall Hargrave
Billionaire David Einhorn has a focus on misvalued stocks on both the long and short side of the market. Putting that strategy to work, Einhorn has returned around 20% annually since Greenlight Capital's 1996 founding. Einhorn graduated from Cornell and studied under SC Fundamental Value Fund managers Gary Siegler and Peter Collery. Einhorn looks for situations with minimal risk, and a general price inefficiency. These opportunities generally include great businesses that are misunderstood. Part of the beauty of finding underappreciated companies is that sometimes it is a double whammy, where these undervalued gems also pay solid dividends, making them great growth and income investment opportunities (see billionaire Einhorn's newest cheap picks).
One of Einhorn's key dividend picks is Computer Sciences Corporation (CSC), with a 2% dividend yield. Einhorn boosted his Computer Sciences stake by 90% and made it the 9th largest position in his 13F portfolio. After addressing problematic contracts, Computer Sciences has managed to beat EPS by 70% during 3Q. Given U.S. budget cuts and prior quarterly issues that lead to negative earnings results, Computer Sciences trades at a negative P/E, but its forward P/E of 12x is well below IT services peers. Computer Sciences is up over 60% year to date, but Billionaire Jim Simons - founder of Renaissance Technologies - is also making Computer Sciences a bullish bet by increasing his stake 40% (see all of Jim Simons' top picks).
Oaktree Capital Group (OAK), the global investment management company, pays a 5% dividend yield and is Einhorn's 26th largest 13F holding. Oaktree focuses on global alternative credit investing and offers its investors high yield in a very low rate environment. Oaktree's recent earnings showed that the investment company is performing well, beating estimates of $0.72 by posting an EPS of $0.88. Growing investment income drove the beat, which reaffirms Oaktree's solid investment record and gives momentum to their credit focused strategy. Trading at only 10x forward earnings, Oaktree appears to be a better value than some of its top peers, such as BlackRock (15x) and Apollo Group (18x).
Aspen Insurance Holdings Limited (AHL), an insurance and reinsurance company, pays a 2.2% dividend yield. Aspen's global operations should help the insurer's growth at 15% annually over the long-term. This puts the insurance company's PEG at 0.6. Written premiums were up 13% in 3Q and operating EPS beat estimates of $0.87 with actual results of $1.34. From a valuation standpoint we see Aspen positioned well with a P/B of only 0.6x. Billionaire Ken Griffin - founder of Citadel Investment Group and former dorm-room options trader - made Aspen one of his newest stock picks (see Ken Griffin's newest picks).
Einstein Noah Restaurant Group (BAGL) pays a 3.1% dividend yield and makes up Einhorn's 13th largest 13F holding. This bagel specialty restaurant is relatively flat year to date - despite being up 15% year to date through October. The recent weakness is due to lower than expected 3Q guidance. Einstein ended up posting EPS that met expectations at $0.20 on a 2% rise in sales year over year. Einstein trades 18x earnings, below one of its top competitors Panera (28x) and has a solid five-year growth rate of 15%. What might drive the stock higher in the interim is the possibility of a sale of the business or a strategic merger. Management is also exploring other ways to maximize shareholder value, including the possibility of a special dividend.
The offshore drilling servicer Ensco PLC (ESV) pays 2.5% dividend yield and is Einhorn's 10th largest 13F holding. This driller trades at the low end of its peers at only 11x earnings and expects utilization rates to remain above 90% for deepwater rigs in 2013. Ensco has become a deepwater focused driller after its 2011 acquisition of Pride International. This acquisition will also be a fundamental driver of Ensco's success with a new presence in Brazil and Africa. Although the acquisition was considered expensive at the time, Ensco still only has debt of $5 billion in 3Q, which puts it debt-to-capital ratio in line with peers at 30%. Ensco has very impressive growth prospects that put five-year expected earnings growth at 30% annually. This stellar growth rate and Ensco's undervalued status makes it a solid growth at a reasonable price play with a PEG ratio of 0.3.
We believe that Computer Sciences is in a unique market that should see a rebound in IT spending as the economy strengthens. Oaktree is a great way to play alternative investments and Aspen has a solid global presence that is helping the company perform well. Einstein is a company that has seen interest from merger-arbitrage funds as the possibility of a merger looms for this specialty restaurant, while Ensco is one of the best value plays we have seen. These five dividend-paying stocks of Einhorn's appear to provide some deep value opportunities, holding up to Einhorn's successful long term strategy.