David Einhorn is one of the rockstars of the finance industry. When this man speaks, the industry listens. Green Mountain Coffee Roasters (NASDAQ:GMCR) stock plummeted 11% within hours after Einhorn gave a presentation on why he was shorting the stock at the Value Investing Congress in October (read about it here). Einhorn states his investment theory simply. "We try to find things that are misunderstood," says Einhorn. "And, then if we think something is misunderstood, then we figure out if it's misvalued. And, if we figure out that it's misunderstood and misvalued, then we tend to invest.”
To get a better idea what Einhorn is buying, I compiled as list of the top yielding stocks in his portfolio. Each of the companies on my list have dividends yields over 3%.
Fifth Street Finance Corp (NYSE:FSC) is a company that provides financing solutions for sponsor-led middle-market buyouts. Its portfolio includes companies like CRGT Inc and Dominion Diagnostics. FSC pays out a 13.1% dividend yield. Einhorn had just under 2M shares in the company at the end of the third quarter. Einhorn had bought the stock aggressively when it was priced under $10 a share, like in the last half of 2008, and sold off chunks when the average price was roughy $13 a share. It is currently trading at $9.69 a share with a one-year estimate of $11.56. Analysts rank the company as a 2.0 on a scale in which 1.0 indicates a strong buy and 5.0 a sell. Obviously, Einhorn’s involvement is also a big mark in its favor, but I’m not buying – at least not at this price. Sure the dividend looks good, but it could be too good. The company’s earnings have shrunk 10.31% per annum over the last five years and are expected to grow just 7.65% per annum over the next five years, falling roughly 5 percentage points short of industry earnings growth estimates. I like FSC closer to $9 a share. At its current price, there just isn’t enough upside.
Seagate Technology (NASDAQ:STX) is a computer hardware company, specializing specifically in storage. The company is a larger position for Einhorn. He keeps almost 3.2% of his portfolio in STX, a position valued at roughly $148.54 million. STX was a new position for Einhorn in the first quarter 2011. He has since increased his stake in the company during the second and third quarters. Taking the average price of the stock during the first nine months of the year, Einhorn would have paid roughly $15.08 a share. STX was trading at $17.10 at the end of November, and has a one-year target estimate of $21.55. In addition to the upside, STX also offers a 72 cent dividend yield per share (a 4.30% yield). Over the last five years, STX earnings have shrunk 3.02% per annum but analysts are expecting its earnings to grow 19.44% per annum over the next five years, around 20% higher than industry earnings growth estimates of 16.02%. I like STX, but I liked it better at $15 a share. Given its previous earnings losses, a 2.34 beta and its price to earnings ratio of 15.89, I wouldn’t risk more than $16 or so a share.
Market Vectors ETF Trust Gold Miner (NYSEARCA:GDX) is a non-diversified fund that works to replicate the performance of the NYSE Arca Gold Miners Index. GDX typically invests at least 80% of its assets in the common stocks and depositary receipts of companies involved in the gold mining industry. GDX is a huge position for Einhorn. He has almost 8.6% of his portfolio invested in GDX, in a position valued at roughly $401M, after he more than doubled his stake in the company during the third quarter. Einhorn said this of his investment in GDX:
During the third quarter, we shifted a portion of our gold investment from physical gold into GDX and ETF gold mining companies. Throughout the course of this year, a substantial disconnect has developed between the price of gold and the mining companies. With gold at today’s price, the mining companies have the potential to generate double-digit free cash flow returns and offer attractive risk adjusted returns even if gold does not advance further. Of course, since we believe gold will continue to rise, we expect gold stocks to do even better.
I agree with Einhorn. There just is not enough interest in gold for it to be a bubble, a sentiment shared with John Paulson and Marc Faber. Further, with the current state of the economy and the tendency of gold to rise on fears of inflation, deflation, Eurozone debt, etc., it is a strong play. Oh, and GDX pays a 3.9% dividend yield.
Einstein Noah Restaurant Group (NASDAQ:BAGL) is the company that owns and franchises the Einstein Brothers, Noah’s New York Bagels and Manhattan Bagel brands. Einhorn has almost 3% of his portfolio invested in BAGL, in a position worth $137.7 million. BAGL offers a 3.7% dividend yield (50 cents dividend) and strong opportunity for upside. BAGL was trading at $13.76 at the end of November. It has a one-year target estimate of $19.33 a share. The opportunity is strong but it is trading high relative to its earnings, 21.11 times its earnings to be exact. The picture is a little better when looking at its forward price to earnings ratio of 14.78 and BAGL has revenue that is almost twice that of its market cap ($414.52M to $223.35M). Also, the estimates for its earnings growth going forward are strong (16.00% vs. industry expectations of 15.10%). But, I’m not convinced. Earnings estimates are frequently wrong and BAGL lost 7.81% per annum over the last five years. Bottom line? I’m not buying.
Microsoft Corp (NASDAQ:MSFT) is the company behind the Windows products and the MS Office Suite. It also develops a range of software and server tools. MSFT’s online services division provides information and content through Bing, MSN Portal and others. Einhorn has more than 8% of his portfolio invested in MSFT. The position is worth $377.61M. MSFT closed trading at $25.58 on November 30, with a one-year estimate of $31.15. It pays an 80 cent dividend (3.20% dividend yield). Einhorn may be enthusiastic about MSFT, but it isn’t an investment for me. Windows and other pieces of MSFT’s technology may be a standard for many people right now, but Apple (NASDAQ:AAPL), with its user friendly interfaces and fewer technical glitches, is rapidly taking market share. To my mind, any money to be made with MSFT right now will be momentum plays. In the long term, my money is on AAPL.
LyondellBasell Industries (NYSE:LYB) is a chemical company. It manufactures and sells chemicals, refines crude oil, creates gasoline blending components and makes the technology for the production of polymers. Einhorn has over 1.13% of his portfolio invested in LYB. The position is valued at $52.9M. LYB offers an impressive $1 dividend (3.30% dividend yield). LYB is undervalued right now, trading at just 5.95 times its earnings. To its favor, it also has 29.10% quarterly revenue growth and it recently offered a special dividend of $4.50 per share. I say buy. This stock has returned 10.52% year to date. If its growth estimates are even remotely right, there is a great opportunity for continued upside.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.