Digging Into Billionaire David Einhorn's Partner Letter, Part 1

Includes: AAPL, GM, GMCR, S, STX
by: Activist Stocks

What carried, or held back, Greenlight's portfolio in 2012? In reviewing billionaire David Einhorn and Greenlight Capital's recent fourth quarter partner letter, we found it worthwhile to outline what helped the fund achieve its 4.9% return during the quarter. Since inception in 1996, Greenlight has managed to return an annualized 19.4% net of fees (check out Greenlight's portfolio).

Its short portfolio did manage to lose money on losses due to positions in many tail risk hedges and losses on European sovereign debt. The biggest culprit of Einhorn's short portfolio under-performance was Green Mountain Coffee (GMCR), which was up big time in 2012, soaring over 70% during the fourth quarter (see Einhorn's newest picks).

Greenlight's long positions helped carry the fund, returning 21% for the fourth quarter. The major contributors were Apple (AAPL), Seagate Technology (STX), General Motors (GM) and Sprint (S). At the end of the third quarter, those long positions stacked up as follows for Greenlight's 13F portfolio:

Company Rank % of Portfolio
Apple 1st 12.1%
Seagate 2nd 8.5%
General Motors 3rd 8.1%
Sprint 17th 2.4%

Apple managed to fall 20% during the fourth quarter, where Einhorn noted that Greenlight used the lower prices as an opportunity to repurchase the shares it sold in the third quarter. The tech company recently reported earnings that showed flat growth, after several years of robust growth. Management predicts growth to continuing slowing, with revenue to be up around 7% for the current quarter, versus 18% during the holiday quarter. The continual innovation of its products have lead to some pressure on margins. Although the company has managed to see iPhone and iPad sales up 71% and 59% year over year, the tech company is losing market share in China, the world's largest market; falling to sixth in the third quarter. Apple is, of course, one of the top ten tech stocks loved by hedge funds (see all 10).

Seagate, one of the largest manufacturers of hard disk drives in the U.S., managed to increase volume shipments in 2012 to 224 million from 199 million in 2011. Read more about how Seagate has, and will, continue making investors rich. Seagate was up over 80% in 2012 on market share gains. The Thailand flood in 2011 put manufacturing constraints on other hard disk drive makers, namely top competitor Western Digital. Seagate trades in line with Western Digital on a price to earnings basis near five times, but Seagate has a dividend yield of 4.1%. This is nearly double Western Digital's 2.1%.

General Motors should continue to grow nicely on U.S. light vehicle sales that are expected to be up 6.6% in 2013. Stacking GM up against its key competitors, the car company trades the cheapest on a price to sales basis:

Price to Sales
GM 0.3
Ford 0.4
Toyota 0.7
Nissan 0.4

CEO Dan Akerson expects GM to regain market share in 2013 after its share of the U.S. automaker slipped to an 80-year low of 17.9% in 2012. Although GM should return to glory in the U.S., it should also benefit from higher demand in emerging markers, namely China. Post-bankruptcy and since its IPO, the car maker's profit margins are up after reduced debt obligations and a reduced production footprint. GM has a much healthier balance sheet than top competitor Ford:

Debt Ratio
GM 10.70%
Ford 54.50%

Sprint is another stock carrying Greenlight's long portfolio. The third largest mobile carrier in the U.S. appears to be the cheapest among its top peers:

Price to Sales
Sprint 0.49
Verizon 1.45
AT&T 1.01

Sprint was up over 140% in 2012 thanks to a large investment by Softbank. Softbank's 70% acquisition of Sprint should give the mobile carrier much needed capital to make spectrum acquisition. The mobile carrier managed to put some capital work with the planned acquisition of Clearwire, which is expected to help with spectrum build-out and make Sprint a stronger carrier.

Green Mountain Coffee Roasters: Einhorn's short positions were a laggard, returning only around half of what the S&P 500 did, with the biggest laggard being Green Mountain. Key theses for shorting Green Mountain includes its over-dependence on the Keurig system. The majority of profits come from sales of the machine and derivative profits from K-cups. Some of its patents have also expired, allowing various companies to roll out K-cup type offerings. Most notable of all the competition is big-time coffee company Starbucks and its Verismo machine.

Overall, Einhorn's portfolio managed to lag the broader market thanks to its under-performing short portfolio and bet on Green Mountain. Its long bets on Seagate and Sprint helped mitigate the damage from the losses on shorts. Part 2 will take a look at Einhorn's big bets for 2013 (check out the top performing hedge funds).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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