David Einhorn's Greenlight Capital recently reported its holdings for the fourth quarter of 2011. The company had a total of 17 increased positions, with several leading tech names in the mix. In this installment of my analysis of recent purchases made by renowned investors, I will analyze 5 technology stocks bought by Greenlight Capital using relative valuation and determine if it makes sense to invest in these securities at current levels.
The companies selected for analysis based on a review of Greenlight Capital's holdings are as follows:
Some basic information about the companies is presented in the table that follows:
The list consists of fairly large cap firms, with Apple leading the way. The smallest firm on the list in terms of market capitalization is Marvell Technology Group. With the exception of Dell, the firms have minimal debt on the balance sheet. Reviewing the 5 year performance, only AAPL reports positive gains. CA investors broke even while YHOO, DELL and MRVL have been industry laggards. However, DELL is up nicely over the last 1 year compared to the 7.5% gain of the tech heavy NASDAQ index. CA is the only dividend paying firm on the list, and sports a very respectable dividend yield of 3.7%.
Next, I looked at the historical growth rates of revenue, income and book value, and the projected long term earnings growth rates. These are summarized in the table shown below:
Apple is the only firm on the list with accelerating revenue, income, EPS and book value growth rates. Dell exhibits improving fundamentals. The company's revenues, income and book value were up significantly compared to its 5 year and 10 year average. CA's revenue growth rate shows a disappointing trend. However, it did increase its book value per share at an impressive rate. Going forward, most of the firms on list are expected to increase their earnings at an annual rate of 11%. Apple is projected to outperform the other firms with a 20% growth rate, while Dell is seen as a laggard with a 5% predicted annual increase in earnings.
After checking the historical and projected future growth rates, I evaluated the gross and operating margins of the 5 companies selected for analysis. The table that follows presents the evaluation results.
All the firms have done a good job in maintaining / increasing their margins. MRVL reported a decrease in margins during the trailing twelve month period. Outside of MRVL, most firms have improved their margins during the last year.
Coming to other operational aspects of the firm, I paid close attention to the return on invested capital, and the capital expenditure as percentage of sales that the firms were using to fund their growth.
AAPL is the clear winner here, with no firm reporting ROIC in the vicinity of the impressive number put up by AAPL. DELL's capex needs are minimal, and have stayed constant as a percentage of sales. YHOO's capex need,s on the other hand, have increased over the last several years.
Now that we have developed a good idea about the fundamentals of the companies selected for analysis, the next step was relative valuation. The multiples used in the analysis were based on historical analysis of individual company and industry multiples.
The table below presents the valuation analysis results.
As shown in the table above, 3 of the 5 companies (DELL, MRVL and YHOO) are significantly overvalued at current levels and make good short candidates. AAPL offers the highest upside from current levels. CA is also undervalued and offers 12% return (including dividends).
As always, please do not consider this list as a "buy" list, rather use this list as a starting point for your research.