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Reviewing David Einhorn's Deep Value Stocks

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GuruFocus.com
·4 min read
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I like to follow the investments of David Einhorn (Trades, Portfolio)'s Greenlight Capital when they're revealed in the firm's quarterly 13F reports.

I think it is worth following this investor because while he has had a relatively tough time recently. In the past, his value investing mentality has produced substantial returns for his hedge fund investors. Since inception, Greenlight capital has produced an average annualized return in the double digits after fees.


Undervalued stocks

Einhorn likes to buy and hold deeply undervalued securities. He is one of the few remaining deep-value investors looking to buy $1 for fifty cents. Many of the stocks in his Greenlight portfolio are trading at a deep discount to net asset value or a single-digit price-earnings ratio.

As a result, reading through the firm's latest 13F can be an excellent way to find undervalued securities, although it is just a starting point for further research.

A great example of the sorts of businesses the hedge fund manager likes to own is Atlas Air Worldwide Holdings (NASDAQ:AAWW). According to Einhorn's second-quarter letter to investors, the firm acquired shares in this aircraft operator during the second quarter. Greenlight paid 0.5 times tangible book value, according to the letter, and seven times 2019 earnings "that were achieved during much more competitive conditions."

Due to surging demand for airfreight during the second quarter, market rates jumped by over 100% during the period. Einhorn noted, "As a result, we expect AAWW to see significant growth in earnings per share in 2020."

The fund also continues to own Brighthouse Financial Inc. (NASDAQ:BHF). This is now the third-largest position in the funds, making up 11% of assets under management. The stock has significantly underperformed the market in recent years. However, it has continued to create fundamental value for investors. As Einhorn noted in his second-quarter letter, since 2017, the company has generated, "$6 billion of retained earnings while repurchasing 22% of its shares. In response to the market now values the company at about $2.5 billion," down from $6 billion in 2017.

The company is facing some headwinds, but with the stock trading at a price-book ratio of 0.16 times, these "should not be a risk to the stock price." Einhorn went on to explain that the company is currently trading at a price-earnings ratio of 3.3 on an adjusted basis. It plans to return a total of $1.5 billion to investors this year, with $636 million remaining. According to the letter, "this implies the company will acquire an additional 23% of the stock over the next 18 months."

As well as these positions, Einhorn also added a holding in Canada's Teck Resources (TEK) during the quarter. The value investor acquired 2.4 million shares in the diversified mining group for a total price of $25 million, giving it a 2.7% portfolio weight. He also acquired shares of Resideo Technologies (NYSE:REZI), building a total position worth $23 million. The provider of home comfort and security solutions is not a traditional value investment. It's probably more of a growth play, in my opinion, but it provides some diversification for the fund overall.

Einhorn also sold some holdings during the second quarter. He reduced positions in small holdings such as American Express (NYSE:AXP), Goldman Sachs (NYSE:GS) and Walt Disney (NYSE:DIS), all of which were less than 2% of the portfolio.

The most substantial disposal was a 1.6 million share position in Altice USA (NYSE:ATUS). This used to make up 5% of the equity portfolio. In his letter, Einhorn said that he sold the holding at a 36% gain over two years due to "concern about the 2020 advertising environment and potential broadband regulations."

Disclosure: The author owns no share mentioned.

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This article first appeared on GuruFocus.