Undervalued Picks From A Top Investor

Includes: CI, GM, MRVL, MSFT, S, STX
by: FAF Research

In this article I describe stocks I found interesting from Greenlight Capital's portfolio and explain some facts about each company. Greenlight is the hedge fund that David Einhorn started in 1994 with just $300,000 and now has more than 5 billion in assets under management. David Einhorn is one of the most successful long/short equity hedge fund managers of the past decade. David Einhorn's Greenlight Capital returned 15.9% in 2010, and 21.5% since its inception in 1996. Greenlight Capital's market beta is around 0.5, meaning if they didn't have any stock picking skills, they would have returned about half of the market's return. It is important to evaluate not only each company's fundamentals and the whole "story" but the quality of the management. I analyzed Greenlight's holdings using whalewisdom.com.

Seagate Technology (NASDAQ:STX)

I think STX could be an interesting pick for dividend oriented investors. Seagate has the biggest yield in the computer-data storage industry group. Seagate is one of the highest-yielding tech issues in the S&P 500, which it joined in late June.

Seagate didn't always reward shareholders with a dividend. It halted payouts for more than two years starting in early 2009. But Seagate announced the return of its dividend program in April 2011. The company cited its strong balance sheet, ability to generate cash and its commitment to maximize shareholder value. That is a bullish case for investors.

Seagate also trades at five times forward earnings, has an even lower five-year PEG of 0.2, and pays a 3.9% dividend yield. Seagate looks like a stock that marries low valuation multiples with high expected growth and dividend payments. I invested in STX when the stock was $12 and Einhorn just initiated his position. I followed a great recommendation from Warren-Trades newsletter, which I recommend to value-oriented investors.

Seagate Technology was recently downgraded to Hold at Stifel Nicolaus. As STX shares went up significantly, Stifel sees a more balanced risk/reward profile at current levels.

General Motors (NYSE:GM)

General Motors reported strong numbers in the recent quarter. GM reported Q2 earnings of $0.90 per share, excluding non-recurring items, $0.11 better than the Capital IQ Consensus Estimate of $0.79 while revenues fell 4.6% year/year to $37.6 billion vs the $38.5 billion consensus. The decrease was due almost entirely to the strengthening of the U.S. dollar versus other major currencies. Earnings before interest and tax (EBIT) adjusted was $2.1 billion, compared with $3.0 billion in the second quarter of 2011. Management gave an optimistic outlook:

"Our results in North America, our International Operations and at GM Financial were solid but we clearly have more work to do to offset the headwinds we face, especially in regions like Europe and South America. Despite the challenging environment, GM has now achieved 10 consecutive quarters of profitability, which is a milestone the company has not achieved in more than a decade."

General Motors Company has a market cap of $34.47 billion. Shares trade at a very compelling valuation, with a P/E ratio of just 6.8x and P/S ratio of 0.2x.

Sprint Nextel (NYSE:S)

Sprint could benefit from Apple's iPhone release. This fall, AAPL is widely expected to announce the release of the latest edition to its line of smartphone devices. I view the next-generation iPhone not only as one of the most important positive catalysts for Apple shares in 2012, but also as one of the most important catalysts for chip manufacturers and service providers, as well as competitors in the handset space. I expect the iPhone 5, for both investors and consumers, has the potential to generate the most promising device upgrade cycle in Apple's history. I think that could create a positive share price momentum for Verizon (NYSE:VZ), AT&T (NYSE:T), and S.

I think that Sprint shares will continue rising because its restructuring efforts are going well. Sprint is in the midst of the multi-billion dollar restructuring program known as Network Vision. Through this plan, the company is concentrating on the core Sprint platform, which includes CDMA, WiMAX and Long-Term Evolution (LTE) technologies, and eventual termination of the Nextel platform (iDEN business). Sprint intends to decommission 30,000 cell sites to 38,000, of which 9,600 cell sites were already terminated as of July 2012, a quarter ahead of the schedule. The company expects the
termination of the remaining sites to be over by the end of June next year. Management believes the closing of the Nextel platform will provide savings from utilities and maintenance, and additional savings from tower rent going forward. This will reduce costs, improve efficiencies and provide value to shareholders.

Microsoft (NASDAQ:MSFT)

I believe Microsoft is one of the best picks in the technology sector. Microsoft reported Q4 earnings of $0.73 per share, excluding non-recurring items, $0.11 better than the Capital IQ Consensus Estimate of $0.62 while GAAP revenues rose 4.0% year/year to $18.06 billion. The Server & Tools business revenue grew 13% for the fourth quarter and 12% for the full year. The Microsoft Business Division revenue grew 7% for the fourth quarter and 7% for the full year reflecting continued momentum in Office 2010 sales.

I think the market will support shares as MSFT delivered better than expected 4Q12 results, with revenue and EPS coming in ahead of consensus. MSFT experienced strong demand in its Server and Tools business and its MSFT Business division. Solid revenue growth coupled with continued cost discipline drove double digit operating income growth of 12.2%. I believe that the upcoming release of Windows 8, the next version of Office and the Surface tablet could provide some upside in a declining PC environment.

Microsoft is also focusing on cloud computing and social capabilities. Microsoft is pushing the social aspect of Office 2013, which will allow for documents to be delivered to users through an up-to-date cloud service. The new suite further integrates MSFT's Skydrive and Yammer allowing workers a more mobile and collaborative productivity suite. I am confident that MSFT is taking the appropriate steps to be successful in a post-PC centric world.

Other stocks that Einhorn invested

Einhorn invested in Marvell Technologies (NASDAQ:MRVL) and Cigna (NYSE:CI). Recently RBC Capital Mkts downgraded MRVL to sector Perform from outperform and lowered its target to $12 from $19 saying the company is struggling due to softer PC demand (prompting HDD production cuts), slower-than-expected adoption of SSD and hybrid drives (which contain higher dollar content), slowing TD-SCDMA uptake in China (risk to prior market expectation of 30-45mil units in CY12) and competitive pricing behavior in TD-SCDMA (threatening market share opportunity). I would avoid investing in this Einhorn pick.

Cigna reported strong earnings and revenues. The company reported Q2 earnings of $1.52 per share, excluding non-recurring items, $0.11 better than the Capital IQ Consensus Estimate of $1.41 while revenues rose 35.4% year/year to $7.46 billion vs the $7.22 billion consensus. I am optimistic by the fact that the company raised top end of guidance for FY12, forecasting EPS of $5.25-5.60 from prior guidance of $5.20-5.55 vs. $5.47 Capital IQ Consensus Estimate. Management gave an optimistic outlook:

"We continue to be pleased with the contributions from HealthSpring and the effective execution of our global growth strategy, which continues to yield strong revenue and earnings contributions from each of our ongoing businesses."

Disclosure: I am long STX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.