The ranks of "super-investors" are few, highlighted by the likes
of Warren Buffett, George Soros and Carl Icahn. Investors like to
track their every move.
Smart investors should also watch the moves of David Einhorn, who
runs Greenlight Capital. He started with just $1 million in 1996,
has made more than +20% a year for his clients, and now manages
billions. He's made his name on some high-profile short sales such
as Lehman Brothers and
Allied Capital (
AFC
)
. But he's also done quite well on the long side of his portfolio.
That's why I review his latest holdings to see what he's buying and
selling. In his latest mandated 13-F filing, Einhorn is loading up
on two stocks that trade below
book value
. Here's why.
Ingram Micro (
IM
)
Ingram is the world's largest distributor of computers, printers,
scanners, copiers and other tech products, with operations across
the globe. It's not a sexy business, but it sure is profitable.
During the past three years, Ingram has generated nearly $1 billion
in cumulative free cash -- right at a time when the
economy
has been pretty lousy. With recent tweaks to the business,
management believes that annual
free cash flow
could exceed $500 million if global sales rise at a moderate pace.
All that
cash flow
has created a
balance sheet
on steroids, as gross cash now stands at more than $1 billion and
tangible book value sits at $19.18 a share -- nearly +10% above the
current stock price. If the company can indeed generate $500
million in annual cash flow in coming years, then book value per
share would rise about $3 a share every year, creating annual
returns of nearly +20%.
To be sure, Einhorn, who just bought more than $300 million of
Ingram's stock, isn't looking for swing-for-the fences returns.
Shares are unlikely to move up past the $23 to $25 mark even in a
better economy. So this stock may only have +25% to +35% upside
during the next few years. But that potential upside is matched by
very limited downside thanks to that rock-solid balance sheet.
Trans-Atlantic Holdings (
TRH
)
Companies that are in the business of providing insurance to other
insurers (known as re-insurers) need to keep lots of cash on hand
in case clients need them to pay up. But this firm, with $13.3
billion on hand, may be carrying too much cash. After all,
potential liabilities are less than $10 billion. How did the
company get so much cash? By generating at least $600 million in
free cash flow in each of the past seven years.
And with all that cash gaining almost no interest, Trans-Atlantic
has no choice but to pay out dividends (which offer a paltry 1.6%
yield
) or buy back stock. Trans-Atlantic is focusing on the latter,
having just announced another $200 million buyback program. And as
the share count keeps shrinking, per share profits rise. Analysts
expect this re-insurer to earn more than $6 a share in 2011, and
shares trade for about eight times that forecast.
But Mr. Einhorn is likely here for the balance sheet, not the
income statement
. Trans-Atlantic carries $4.3 billion in shareholder's equity, well
ahead of the company's $3.2 billion
market value
. (Said another way, the stock trades for just 74% of a book value
of $69 a share.) As an added kicker, if and when interest rates
start to rise, all of that sidelined cash will generate hefty
streams of interest income.
Action to Take -->
Mr. Einhorn is known for some high-profile aggressive bets, but
some of his more low-key plays such as Ingram Micro and
Trans-Atlantic Holdings are equally intriguing. Neither is likely
to make you rich, but they look like solid "safe" plays with nice
upside.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
More...
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.