By Matt Doiron
David Einhorn is best known as a value investor, but not everything that he buys fits the classic profile of a value stock on a quantitative basis. Some of Greenlight Capital's investments have fairly low earnings compared to their stock price, or are even unprofitable. But in these particular cases, Einhorn and his team have done their homework on the stock and think that earnings will increase over time enough to make it a buy. We went through Greenlight Capital's 13F filing for the second quarter and found four stocks which had a position of at least $100 million and either negative trailing earnings or a trailing P/E of at least 20. Interestingly, Einhorn's largest position in his portfolio, Apple Inc. (AAPL), doesn't satisfy these criteria despite being a high-growth stock. Apple's trailing P/E ratio is in the value territory considering its high growth rate.
Einhorn's top growth stock is the financially hapless Sprint (S), which has the unenviable position of having delivered net losses in each of the past four quarters (though, in each case, these losses were below what sell-side analysts expected) and seeing Wall Street project negative earnings for the rest of this year and for 2013. Sprint is gaining interest from investors due to its pricing position versus other wireless companies, but so far this has only paid off with light revenue growth. However, Greenlight's 72 million share position in the stock has been profitable this year- the price has more than doubled- so Einhorn may be close to taking profits.
NCR (NCR) is another Greenlight favorite, with the fund reporting 8.3 million shares in its portfolio at the end of June. Formerly known as National Cash Register, the company now focuses on ATMs and various other self-service kiosks. It trades at 31 times trailing earnings, but in its most recent quarter reported blowout numbers- an 11% increase in revenue and a 142% increase in earnings compared to the same period the previous year- beating analyst estimates for the fourth quarter in a row. The sell-side is catching on, with current earnings estimates implying a forward P/E of 8 and a five-year PEG of 0.6. If the company comes close to those numbers, Greenlight should reap high returns.
The fund initiated a 4.9 million share position in Virgin Media (VMED). The broadband, cable, and phone company has had a rocky time in the past few quarters and investors are now highly bearish on it compared to sell-side estimates. In its most recent quarter, earnings fell by 34% compared to a year ago, and the company's exposure to the British economy is a drawback. If the company can pull through, however, it is undervalued compared to earnings projections. Tiger Cub Philippe Laffont also reported a large stake in Virgin Media in the second quarter.
Greenlight cut its holdings of CareFusion (CFN) by more than half in the second quarter but still finished June with 4.6 million shares of the company in its portfolio. CareFusion is up about 5% this year, underperforming the market, and carries a trailing price-to-earnings ratio of 20. However, the medical instrument company grew its earnings 29% last quarter compared to the same period in 2011 and its forward earnings multiple is only 11, so once again Einhorn has a good deal of company on Wall Street that believes that the stock will deliver on growth.
Our takeaway on these four stocks is that we're not sure enough about how the telecoms' businesses are faring- Sprint's in particular- to recommend a position. We think that NCR is a good growth stock, and that in a relatively short amount of time, it should either appreciate substantially in price or enter value stock territory. As we've mentioned, the company doesn't have to meet expectations to prove a good buy, it just has to come close. CareFusion also appears cheap on a forward basis, and could be worthy of more investigation.