David Einhorn Top Holdings Analysis

by: FAF Research

I like to examine what hedge fund managers do with their portfolios. After I found several stocks that they share I examine the peculiarity of each company, that is, its business and management aspects plus how it compares to other businesses in the same industry. It is essential to invest in companies that are superior in relation to its competitors. I think that reading only the financial reports of a company is not enough to justify an investment. The essential point is to invest in companies that are within my circle of competence. I also emphasize in each company's future prospects and management capabilities.

Here is a list of stocks that could be interesting for further research. I pay lots of attention to stocks that powerful hedge funds buy because they have a team of analysts that spend the whole day interviewing customers and vendors from each company. Because I am unwilling to commit the time and energy to make tons of calls to individuals who are familiar with each company's businesses I rely on what each team of analysts selected and then I evaluate which stock deserve a deep research from my part. David Einhorn's Greenlight Capital is one of the best fundamental stock picking Hedge Funds. I will analyze each holding via whalewisdom.com and check if I would buy, hold or sell the stock at this moment.

Apple (NASDAQ:AAPL) - My opinion: BUY

Einhorn holds a high concentrated position of 15.9% in Apple . He did not touched the position in the last quarter.

AAPL is my favorite stock. Innovation, brand and a strong moat are Apple's advantages. Apple is recognized as a leading innovator in the consumer electronics market. According to a recent study by market-research agency Millward Brown, Apple continued to maintain its #1 position as the world s most-valuable brand over the last year. I believe that Apple s significant brand equity and timely update of all its core products will help the company to maintain its strong customer base and dominant market position in all its served markets going forward.

The most interesting fact about AAPL comes from its future products. Apple will launch several great products in the future that will include an new iPhone, an Apple TV, an innovative payment systems from mobile devices (iPayments) and other products I do not imagine. Apple's innovation has not stopped and that is important to remember.

The iPhone product line is Apple s most successful to date, having sold approximately 1.33 billion units over the last three fiscal years (2009, 2010 and 2011). The iPhone 4S has gained tremendous success since its release in October 2011 on the back of an increased number of carriers operating all over the world (total number of carriers are now 230 spanning 105 countries). Imagine the effect of a new iPhone 5 with better screen, tools and design. How sales will react ? The iPhone is of great strategic importance to Apple, and the subsequent updated versions will help the company to penetrate further into several international markets, familiarizing people with the Apple brand name and the Apple ecosystem. Apple has a strong emerging market future growth, and we can see in the results the company is experiencing in the Chinese market, which is growing at triple digits. I believe that the market is not pricing the strong emerging growth that AAPL will experience in the coming years.

Apple is not an expensive stock. The stock is trading at just 12x forward P/E for 2012, a 28.4% premium to the peer group average of 9.5X. However, the stock has traded historically at a 32.5% average premium, which seems to indicate upside from the current low valuation level.

Why AAPL is a super strong buy ? strong brand, moat, exposure to emerging markets growth, exposure to high growth tech areas and the best financials and balance sheet plus attractive stock valuation.

Seagate Technologies (NASDAQ:STX) - My opinion: SELL

Einhorn hold a 7.1% in his portfolio in Seagate shares. He did not touched his position in the last quarter.

I think there are several factors that could keep shares range-bound over the near term that are PC related news flow, higher inventories and secular macro concerns. The stock broke a key $26 support level recently and I think shares will go down.

Dell (NASDAQ:DELL) accounted for approximately 13% of Seagate consolidated revenue in FY11. I do not like STX exposure to both DELL and Hewlett-Packard (NYSE:HPQ), which they combine 30% of STX's revenues.

I also do not feel comfortable with STX because it is a business that I really do not understand. They make a product that is exposed to a high degree of technological changes and that create volatility and risk into the shares. I will wait until the stock goes to $20 after I consider this company.

Recently Seagate announced a $2.5 bln share repurchase and management expressed:

"The repurchase authorization reflects the confidence that the Board and the executive management team have in Seagate's ability to generate cash, while still investing in innovation and growth opportunities. We expect to fund the share repurchase through a combination of cash on hand, future cash flow from operations and potential alternative sources of financing."

General Motors (NYSE:GM) - My opinion: BUY

Einhorn holds 6.9% of his portfolio in General Motors . He decreased his position by 22% last quarter.

Recently GM reported $0.08 better than the Capital IQ Consensus Estimate of $0.85 while revenues rose 4% year/year to $37.8 bln vs the $37.51 bln consensus. Management expressed high confidence in the business:

"The U.S. economic recovery, record demand for GM vehicles in China and the global growth of the Chevrolet brand helped deliver solid earnings for General Motors. New products are starting to make a difference in South America, but Europe remains a work in progress. We'll continue to work on both revenue and cost opportunities until we have brought GM to competitive levels of profitability."

To me, GM is a great turnaround play. With the strengthening U.S. economy helping release pent-up demand,GM now expects that full-year 2012 U.S. light vehicle sales will be in the 14.0-14.5 million range. Previously, the co expected sales to fall between 13.5-14.0 million units.

One risk from GM is that the business is not immune to internal issues and inventory in Europe where the company ended Q1 with more inventory than they would like while that compensates with the growth that GM is experiencing in China, where it will stay in offense. The company announced it will add additional 600 dealers in China this year as products are selling with great success.

GM is also a clear undervalued play. Currently, shares of General Motors are trading at 6x 2012 average analyst EPS estimate of $3.53. The company's current trailing P/E is 5.8x, compared with the 11.0x average for the peer group and 14.0 for the S&P 500. Over the last five years, shares have traded in a range of 5.0x to 10.3x trailing

P/E. The stock is trading at a discount to the peer group, based on forward earnings estimates and past P/E range.

Marvell Technologies (NASDAQ:MRVL) My opinion: SELL

Einhorn holds a 5.2% position in Marvell Technologies . He maintained it unchanged in last quarter.

Marvell Technology has been a high-growth chipmaker during the past decade, with a leading market share position as a chip supplier to the data storage industry. Marvell will face some near-term headwinds and should continue to encounter fierce competition, particularly in nonstorage end markets. I do not feel comfortable with the overall business of MRVL: I do not understand it.

Marvell's core business relates to the design of system-on-chip solutions used in hard disk drives (HDDs) for enterprise and PC storage solutions. Morningstar analysts think that the firm's extensive research and development staff and strong SoC integration skills, particularly relating to data storage chip designs, are the source of Marvell's narrow economic moat.

I think the HDD market is highly volatile and unpredictable. I can not invest in this company.

Morningstar analyst value MRVL at $20 per share, which implies fiscal 2013 (ending January 2013) price/earnings of 16 times, an enterprise value/EBITDA of 17 times, and a 5% free cash flow yield. I will pass on this Einhorn pick.

CareFusion (NYSE:CFN) My opinion: SELL

Enihorn holds a 4.9% position in CFN. He increased it by 5.75%.

Recently, CareFusion beated by $0.04 in EPS and also beated on revenues. The company reduced guidance, which created volatility in the stock after the report.

CareFusion is a global corporation serving the health care industry with products and services that help hospitals measurably improve the safety and quality of care.

Market leadership in many of its operating segments makes CareFusion an essential hospital device provider across the United States. If CareFusion can maintain product innovation and boost profitability through restructuring, then I think it has the long-term potential to earn sustained returns on capital in excess of its cost of capital.

CareFusion sells a variety of hospital devices, including intravenous infusion pumps, medication dispensing equipment, respirators, ventilators, and infection control products. These products have a long operating life with recurring revenue from corresponding disposables. CareFusion maintains the number-one market position in many of its product categories, especially in infusion pumps and medication dispensing equipment, where we estimate it holds 25% and 70% share, respectively. Like STX and MRVL, I do not understand CFN to invest with confidence.

The stock issued a reduced guidance and I do not expect shares to appreciate considerably. It could be an interesting pick for health care interested investors but I will pass on this opportunity.

Other stocks that Einhorn likes:

Einhorn also holds a 4.6% position in Delphi (NYSE:DLPH) and a 4.4% in Microsoft (NASDAQ:MSFT). He maintained his DLPH position while reduced by 50% his MSFT position last quarter.

Regarding DLPH, I think that with strengthening US sales and no further deterioration of European production and sales (albeit coming from weakness), an easy superficial case can be made to buy any auto parts supplier stock. In a recent report, Barclays analyzed that North American suppliers have rallied strongly this year, yet despite the run up, valuation metrics are still cheap by historical standards. However, rather than a rising tide floats all boats market, Barclays think going forward in 2012 investors should focus more carefully on differentiating between the suppliers.They recommend focusing on DLPH, which they see as the strongest supplier that can differentiate in the mid-term.

I like his MSFT pick. I think that MSFT has plenty of legs remaining in several of its products (Office 2010, Windows 7, Kinect, etc.) and has one of the most promising product cycles (Windows 8, Windows 8 Server, Office 12, etc.) in its history in front of it, and is levered to numerous secular trends (cloud computing, virtualization, big data, etc.), which should enable the company to outpace IT spending and outperform its peers for the foreseeable future. The shares are cheap at only 9.6x forward P/E.

Disclosure: I am long AAPL.