Finding Bargains in David Einhorn's Portfolio
Value investor David Einhorn (Trades, Portfolio) has an impressive track record when it comes to beating the stock market.
His hedge fund, Greenlight Capital, has generated 12.7% annualized returns since inception in May 1996, net of fees and expenses. Over the same time frame, the S&P 500 has returned around 10% annually.
Disappointing year
Like many value investors, the hedge fund manager had a disappointing year in 2019. In a year where the S&P 500 added around 30%, Greenlight Capital rose just 13.8%. Greenlight's long positions gained 37.4%, while its short positions detracted 20.1% from the performance. Greenlight's returns on the long side in 2019 are a testament to Einhorn's skill in value stock-picking.
Einhorn's value holdings
DXC Technology Co (NYSE:DXC) earned a position in the hedge fund's portfolio in the most recent quarter. At the end of 2019, the fund owned 813,000 shares worth a total of $30.5 million, giving it a 2.3% portfolio weight.
Einhorn also added to a couple of other positions. Most notably, he increased his holding in chemicals producer Chemours Co (NYSE:CC) by 5% to 6.8 million shares, giving it a 9.1% portfolio weight. The position is now the fifth largest holding in the portfolio, sitting behind life insurance group Brighthouse Financial (NASDAQ:BHF).
Einhorn believes the market is overestimating Chemours' liabilities that stem from lawsuits regarding some of its products. The hedge fund manager also thinks that the group's core business, the manufacture of titanium dioxide and refrigerants, will improve substantially in 2020. In his fourth-quarter letter to investors, Einhorn wrote:
" We believe Chemours's results are set to improve. The titanium dioxide cycle is turning more favorable as the destocking has run its course and Chemours is poised to retake lost share. Refrigerants should improve in 2021 as European fluorinated gas legislation mandates a further phase-out of older refrigerants, raising demand for the new generation refrigerants where Chemours holds valuable intellectual property."
Right now, the stock is trading as a forward earnings multiple of just five and supports a dividend yield of 6.9%. Finding a company that has a dividend yield above its earnings multiple is extremely rare. Chemours is just the sort of value investment Einhorn excels at discovering.
Long association
Greenlight also added to its position in EchoStar Corp (NASDAQ:SATS) in the fourth quarter of 2019.
This provider of satellite operations and digital video solutions does not look particularly cheap on an earnings basis. Indeed, the stock is losing money. However, when you dig below the surface, it becomes clear that this opportunity has value.
It is currently trading below book value and at a price to tangible book value of just 1.1. It is also dealing at an enterprise value to Ebitda ratio of 5.3.
While the business might not be profitable on a net income basis, it generated $1.80 per share in free cash flow last year. That suggests a free cash flow yield of 5.1% at current levels. It also has net cash of $70 million on the balance sheet.
The position accounted for just 2.2% of Greenlight's portfolio at the end of the fourth quarter. Einhorn establsihed the holding in the fourth quarter of 2018, but this isn't the first time he's owned the stock. He first bought EchoStar in the first quarter of 2008, before selling out towards the end of 2009.
With this being the case, it would appear that he has a long association with the business, and that could imply he's seen something the rest of the market is missing.
Disclosure: The author owns no share mentioned.
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This article first appeared on GuruFocus.
