by Guan Wang
It's time to buy technology stocks. We think tech stocks are grossly undervalued as a sector and most of them have very strong growth prospects. Billionaire hedge fund manager David Einhorn certainly seems to have noticed the great opportunities in the technology industry. Greenlight Capital, the hedge fund Einhorn started in 1996, invests nearly half of its 13F portfolio in the technology sector. Einhorn has a strong track record. His fund has a beta of around 0.5, which means that it would only generate half of the market's return if Einhorn did not have any stock picking skill. However, the fact is that Greenlight has outperformed the market since inception. Last year was not a year for hedge funds, but Greenlight still outperformed the market.
Einhorn recently released the 13F holdings of his portfolio as of March 31, 2012. We are going to discuss some of Einhorn's largest positions in this article.
The largest position in Greenlight's 13F portfolio at the end of March was Apple Inc (AAPL), a very popular stock amongst the hedge funds we track. Einhorn had $877 million invested in Apple at the end of the first quarter. Other big names with Apple in their portfolios include Stephen Mandel, Chase Coleman, Andreas Halvorsen, Jim Simons, and Lee Ainslie (check out Jim Simons' top stock picks).
Apple's performance has been very strong recently. It is up 56% over the past 52 weeks, while the S&P 500 index is down about 0.55% for the same period. Apple is currently trading at about $530 per share and has a market cap of nearly $500 billion.
The high price may make some investors hesitate to purchase Apple, or they may be concerned about the sustainability of Apple's growth -- but Einhorn thinks it is wrong to be scared off. In the recent Ira Sohn Investing Conference, Einhorn said that he would not be surprised if Apple became a trillion dollar worth company (check out Einhorn's likes and dislikes at the conference).Einhorn thinks Apple is "one of the most misunderstood stocks on the market". According to him, Apple is not a hardware company, but a "software company that monetizes its value from repeated sales of high margin hardware".
We agree with Einhorn on Apple. Its current market price still has not fully reflected its strong business model and growth potential. It is currently trading at 10X its 2013 earnings, versus the industry average of 12. It has been outpacing the industry's revenues and earnings growth over the past few years, and it is expected to continue such robust growth. Apple's earnings are expected to roar at an average of 21% in the next couple of years, while its revenues are expected to rise at about 44%. The company also has a strong balance sheet. It has no debt and a quick ratio of 1.32.
The second-largest position in Einhorn's portfolio at the end of the first quarter was Seagate Technology Plc (STX). Einhorn slightly increased his stakes in this position by 1% during the first quarter. As of March 31, 2012, Einhorn had $392 million invested in this stock. Seagate's performance so far this year has been stunning. To date, the stock returned 78%, beating the market by over 73 percentage points. Besides Einhorn, a certain number of other money managers also made a bundle from their stakes in Seagate. For example, Edward Lampert's ESL Investments also had $100+ million invested in Seagate at the end of last year.
Seagate acquired the hard disk drives division of Samsung Electronic last year, which is expected to boost Seagate's production capacity by about 33%. Moreover, the flood in Thailand has destroyed the facilities of many hard disk drive producers. The decline in supply has lifted the prices, benefiting Seagate. Additionally, as Seagate has signed long-term agreements with several major PC OEMs, we think the company will continue to benefit from the higher prices even after hard disk drive supply recovers.
Seagate's revenues are expected to grow by 41% in FY 2012 and 31% in FY 2013, while its earnings are expected to rise over 40% per year - but such high growth is not reflected in its price. Seagate's EPS is expected to be $7.19 in 2012 and $9.81 in 2013. Trading at slightly below $27 per share, Seagate's 2012 P/E ratio is only 3.7 and its 2013 P/E ratio is only 2.7.
Other large positions in Einhorn's portfolio include General Motors Co (GM), Marvell Technology Group Ltd (MRVL), and CareFusion Corp (CFN). GM is the most popular automobile stock amongst the hedge funds we track. Eighty hedge funds had GM in their 13F portfolios at the end of 2011. Marvell and CareFusion are also quite popular. There were 30 hedge funds invested in CareFusion and 27 hedge funds invested in Marvell at the end of March. All three stocks have attractive valuation levels. GM is trading at only 4.5X its 2013 earnings, while Marvell's 2013 P/E ratio is 10 and CareFusion's is 12.