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David Einhorn is a noted activist investor, taking positions in companies in which he believes that shareholder value can be unlocked through pushing management to make operational and structural changes. He is president of Greenlight Capital, a value oriented investment advisor, which has since inception exceeded an annualized return of 21%. He has long been bullish towards gold, primarily through the purchase of Gold ETFs, but he’s now expanding that view to include gold miners as well.

His investment approach focuses on emphasizing intrinsic value as a means of achieving consistent absolute investment returns and safeguarding capital regardless of market conditions. He has stated when discussing his investment style:

What I like is solving the puzzles. I think that what you are dealing with here is incomplete information. You’ve got little bits of things. You have facts. You have analysis. You have numbers. You have people’s motivations. And you try to put this together into a puzzle or decode the puzzle in a way that allows you to have a way better than average opportunity to do well if you solve on the puzzle correctly, and that’s the best part of the business.

In this article I will analyze five recent stock purchases by David Einhorn to determine whether they represent solid investment opportunities.

Marvell Technology Group Limited (MRVL)

Marvell Technology has a market cap of $8.91 billion, and is currently trading at around $15, with a price to earnings ratio of 11.82. Its 52 week trading range is $11.23 to $22.01. It reported third quarter 2011 earnings of $897.52 million, an increase from second quarter earnings of $802.40 million. The income statement showed net income in the third quarter of $192.39 million, a significant increase from the second quarter net income of $146.86 million. It has quarterly revenue growth of 0.10%, a return on equity of 16.34% and doesn’t pay a dividend.

One of Marvell Technology’s closest competitors is ST Microelectronics NV (STM). ST Microelectronics has a market cap of $5.93 billion and is trading at around $7. It has a price to earnings ratio of 6.85, quarterly revenue growth of -8.10%, a return on equity of 5.97% and pays a dividend with a yield of 5%. This data indicates that both companies are performing on par.

Einhorn holds 16,640,000 shares of Marvell Technology, buying the entire holding in the third quarter 2011. The average purchase price per share was $14.21. Based upon the last trading price of $14.65, he has made a return of 3.10%.

Marvell Technology´s cash position has worsened in the last quarter. Its balance sheet showed $862.97 million in cash for the third quarter an increase from $782.40 million cash in the second quarter. Marvell Technology’s quarterly revenue growth of 0.10%, versus an industry average of 8.00%, and a return on equity of 16.34%, versus an industry average of 17.60%, indicates that it is underperforming many of its peers.

The earnings outlook for the semi-conductor industry is currently poor. The chairman of TSMC, a Taiwanese semiconductor producer, stated that; “the semiconductor industry is going to face a slow recovery from its present weakness, due to the depressed global economic outlook and declining consumer demand resulting from high unemployment and low consumer sentiment.” But it should be noted that the weaker US dollar will make US exports cheaper and more attractive to overseas buyers, which bodes well for US based manufactures such as Marvell.

When the industry outlook is taken into account in conjunction with the company’s significant increase in net income and reasonable return on equity, I understand Einhorn’s decision to invest in the company. Accordingly, I rate Marvell Technology as a buy.

CBS Corporation (CBS)

CBS has a market cap of $16.25 billion, and is currently trading at around $25, with a price to earnings ratio of 14.12. Its 52 week trading range is $15.99 to $29.68. It reported third quarter 2011 earnings of $3.37 billion, a decrease from second quarter earnings of $3.59 billion. Third quarter net income was reported as $338.00 million, a decrease from second quarter net income of $395.00 million. It has quarterly revenue growth of 2.10%, a return on equity of 12.54% and pays a dividend with a yield of 1.60%.

One of CBS’ closest competitors is Nexstar Broadcasting Group Inc (NXST). Nexstar has a market cap of $262.35 million and is trading at around $9. It doesn’t have a price to earnings ratio, quarterly revenue growth of 2.30% and no return on equity. It currently doesn’t pay a dividend. Based on these indicators, it appears to be underperforming CBS.

David Einhorn holds 5,000,000 shares of CBS, buying the entire holding in third quarter 2011. The average purchase price per share was $25.08. Based upon the last trading price of $24.78, he has made a return of -1.20%.

CBS’ cash position has improved with $947 million in cash for the third quarter 2011 a decrease from $1.35 billion cash in the second quarter. Net tangible assets have increased to -$5.27 billion in the third quarter, from -$5.25 billion in the second quarter. Its quarterly revenue growth of 2.10%, versus an industry average of 0.00%, and a return on equity of 12.54%, versus an industry average of 14.30%, indicates that it is underperforming many of its competitors.

The outlook for the broadcast TV industry is relatively positive despite the negative economic conditions. This can be attributed to an improvement in revenues being derived from adverting driven by an uplift in the performance of the US economy.

Based on the relatively positive industry outlook coupled with what appears to be an opportunity to focus on improving management operations to lift the return on equity coupled with a solid balance sheet I can understand Einhorn’s decision to invest in CBS. Accordingly, I rate the company as a buy.

Legg Mason Inc (LM)

Legg Mason has a market cap of $3.48 billion, and is currently trading at around $25, with a price to earnings ratio of 15.19. Its 52 week trading range is $22.61 and $37.82. Third quarter 2011 earnings of $669.90 million were reported, a decrease from second quarter earnings of $717.11 million. Third quarter net income was $56.66 million, a decrease from second quarter net income of $59.95 million. It has quarterly revenue growth of -0.70%, a return on equity of 4.29% and pays a dividend with a yield of 1.20%.

One of Legg Mason’s closest competitors is BlackRock Inc (BLK), which has a market cap of $28.49 billion and is trading at around $159. It has a price to earnings ratio of 12.57 quarterly revenue growth of 6.40%, a return on equity of 9.50% and pays a dividend of 3.40%. Based on this data BlackRock is outperforming Legg Mason.

David Einhorn holds 2,600,000 shares of Legg Mason, buying the entire holding in the third quarter 2011.The average purchase price per share was $28.61. Based upon the last trading price of $25.03, he has made a return of -12.51%.

Legg Mason’s cash position has declined with the balance sheet showing $1.12 billion in cash for the third quarter, a decrease from $1.24 billion in the second quarter. The net tangible assets have decreased with $408.21 million in the third quarter 2011 down from $562.02 million in the second quarter. Legg Mason’s quarterly revenue growth of -0.70%, versus an industry average of 22.70%, and a return on equity of 4.29%, versus an industry average of 10.30%, indicates that it is underperforming many of its competitors.

The earnings outlook for the asset management industry is relatively positive, with Moody's Investors Service revising its outlook for the industry to stable from negative on the basis of the sector's “significantly improved earnings capacity” and enhanced balance sheet strength. However, some caution should be exercised as any further downturn in the economy will have a direct impact on the earnings of Asset Managers, as it will affect investment returns and reduce demand due to a negative impact on investor sentiment.

Despite the relatively positive industry outlook, I do not agree with Einhorn’s decision to invest in Legg Mason, primarily as it has reported a drop in net income and cash holdings as well as having poor performance indicators. Additionally unlocking share holder value through restructuring Asset Managers can be quite difficult due to the degree of regulation in the industry. On this basis, I prefer to take a wait-and-see approach, and rate the company as a hold.

Barrick Gold Corporation (ABX)

Barrick Gold has a market cap of $48.98 billion, and is currently trading at around $49, with a price to earnings ratio of 11.74. Its 52 week trading range is $42.50 to $55.95. It reported third quarter 2011 earnings of $4.01 billion, an increase from second quarter earnings of $3.43 billion. Third quarter net income was $1.38 billion, an increase from second quarter net income of $1.16 billion. It has quarterly revenue growth of 43.70%, a return on equity of 19.14% and pays a dividend with a yield of 1.20%.

One of Barrick Gold’s main competitors is US Gold Corporation (UXG). US Gold has a market cap of $598.14 million and last traded at around $4. It doesn’t currently have a quarterly revenue growth rate, a return on equity of -25.54 and doesn’t have a price to earnings ratio and doesn’t pay a dividend. Based on these indicators, it is substantially underperforming Barrick Gold.

Einhorn holds 1,350,000 shares of Barrick Gold, buying the total holding in the third quarter 2011. The average purchase price per share was $49.59. Based upon the last trading price of $48.84, he has made a return of -1.51%.

Barrick Gold’s cash position has improved. The balance sheet showed $3.09 billion in cash for the third quarter 2011 an increase from $2.76 billion in the second quarter. Barrick Gold’s quarterly revenue growth of 43.70%, versus an industry average of 55.20%, and a return on equity of 19.14%, versus an industry average of 10.30%, indicates it is marginally outperforming many of its competitors.

The earnings outlook for the gold industry is positive, and I believe it will remain so for some time. The key driver for this outlook is the increasing gold price which is being driven by investors seeking a safe haven from the economic and market volatility. In September 2011 the gold price hit a record high, and although it has recently pulled back from that high, the bull run in gold is likely to continue for the short to medium term, which will see increased revenue growth for gold mining companies.

Based on Barrick Gold’s increase in net income and balance sheet cash, coupled with solid performance indicators and the solid industry outlook, I agree with Einhorn’s decision to invest in the company. Accordingly, I rate Barrick Gold as a buy.

Compuware Corporation (CPWR)

Compuware has a market cap of $1.83 billion, and currently trades at around $8, with a price to earnings ratio of 17.03. Its 52 week trading range is $6.97 to $12.25. It reported third quarter 2011 earnings of $260.70 million, a significant increase from second quarter earnings of $229.97 million. Third quarter net income was $22.68 million a large increase from second quarter net income of $16.98 million. It has quarterly revenue growth of 15.40%, a return on equity of 11.41% and doesn’t pay a dividend.

One of Compuware’s main competitors is BMC Software Inc (BMC), which has a market cap of $6.05 billion and is currently trading at around $35.50, with a price to earnings ratio of 14.55. It has quarterly revenue growth of 10.80%, a return on equity of 29.45% and doesn’t pay a dividend. Based on these indicators, both companies are performing approximately on a par.

David Einhorn holds 4,459,027 shares of Compuware, buying the entire holding in the third quarter 2011. The average purchase price per share was $8.70. Based on the last trading price of $8.33, he has made a return of -4.25%.

Compuware’s cash position has substantially declined in the last quarter. The balance sheet showed $63.87 million in cash for the third quarter 2011 a large decrease from $194.87 million in the second quarter. Compuware’s quarterly revenue growth of 15.40%, versus an industry average of 21.90%, and a return on equity of 11.41%, versus an industry average of 24.90%, indicates that it is underperforming many of its competitors.

The earnings growth outlook for the software industry is positive despite the current poor global economic outlook and negative consumer sentiment. Forrester Research believes the global software industry will continue to grow in 2012 despite the decrease in projected growth for the computer hardware industry.

Based upon the substantial increase in quarterly net income and solid performance indicators, I believe that Compuware is a good investment opportunity and as Einhorn is in a position to apply pressure to management to unlock further shareholder value I agree with his decision to purchase a stake in the company. On this basis, I rate Compuware as a buy.

Source: Billionaire David Einhorn's 5 New Big Buys