Known as an activist investor,
is actually a methodical value investor with a long-term track
record of success.
He started his hedge fund, Greenlight Capital, in 1996 with
about $1 million. Seventeen years later, the firm manages more
than $5 billion and Einhorn has delivered average annual returns
of about 19% a year.
Einhorn manages a traditional hedge fund, taking long
positions in stocks that he likes and short positions in
companies he believes are overvalued. Some of his most successful
trades, including a timely trade in Lehman Brothers, have been on
the short side.
In May 2008, Einhorn spoke at a hedge fund conference and
admitted his firm wasn't just shorting Lehman for the money. He
was doing it because, in his opinion, the company was acting
recklessly and putting the entire financial system at risk.
According to reports of his speech, "He ended with a call to
federal regulators to 'guide Lehman toward a recapitalization and
recognition of its losses -- hopefully before federal taxpayer
assistance is required.' "
Lehman went bankrupt in September 2008, and although the total
cost of taxpayer assistance to bail out the financial system is
difficult to determine, it could be in the trillions of
While Einhorn has proven his ability to find winners on the
short side, he maintains a "net long" position in his funds,
which means he has more long positions than shorts. One of his
recent winners on the long side was
Seagate Technology (Nasdaq:
, which Einhorn began buying in 2011 and resulted in a 64%
average annual return in less than two years.
Einhorn selects investments with a traditional value approach,
although he may not be as patient as a typical value investor.
to court in an effort to force the company to return cash to
shareholders, and more recently challenged
Oil States International (NYSE:
to unlock shareholder value.
Among his current holdings are three stocks that have strong
cash flow and high relative strength (
). Cash flow is more predictive of a company's financial health
than earnings, and RS shows how a stock is performing compared
with the rest of the market.
Value stocks can trade at low values for years before other
investors catch on. Buying only when RS is high helps avoid this
problem. RS is shown as a number between zero and 100, with 100
being the strongest and zero being the weakest. High RS means a
stock is among the best performers in the market.
Babcock & Wilcox Co
is a leader in the nuclear power industry. The company makes
nuclear reactors for submarines and aircraft carriers, and even
with cutbacks in defense spending, it reported a $2.8 billion
backlog in that sector. The company also has a backlog of $2.3
billion in its power generation business segment.
For 2013, the company expects revenue of $3.4 billion to $3.5
billion and earnings per share (
) of $2.25 to $2.45, after adjusting for some accounting charges
related to pension obligations and restructuring.
It is unlikely that new competitors will emerge in the near
future in the nuclear reactor business. There are engineering and
regulatory hurdles in place to ensure safety and the market is
fairly limited. The U.S. Navy has plans to buy only two aircraft
carriers between now and 2025, and plans to buy no more than two
nuclear-powered submarines a year for the next decade.
BWC is also providing alternative energy solutions beyond
nuclear power. Last year, the company was awarded more than $900
million in contracts for waste-to-energy projects, including
major projects in the U.S. and Denmark.
BWC has been steadily growing revenue, earnings and cash flow
since 2009. Analysts expect earnings growth to average almost 20%
a year in the next five years. Based on estimated earnings for
2014, BWC is trading with a price-to-earnings (P/E) ratio of
The price/earnings-to-growth (
) ratio compares the P/E ratio with the earnings growth rate and
is about 0.65 for BWC. Stocks with PEG ratios below 1 are
considered to be bargains.
Finally, BWC has a RS rank of 100, meaning it is one of the
absolute strongest stocks in the market right now.
Rite Aid (NYSE:
is not the type of stock usually seen on a list of hedge fund
holdings. The stock trades at about $3.60, under the $5-a-share
price limit set by many large investors. Many brokers will not
allow traders to margin positions in stocks that cost less than
$5 a share, and that means the funds might have to accept
unleveraged returns on their positions in low-priced stocks.
We have no way to know if Einhorn is allowed to margin stocks
trading for less than $5 a share (as allowed by some brokers) or
if he is convinced the stock can deliver gains without
RAD operates more than 4,600 drug stores around the country,
making it the third largest drug store chain in the country.
Revenue topped $25 billion in the past 12 months with RAD
reporting a profit of $0.24 per share.
The company's fiscal year ended in March, and RAD reported its
first full-year profit since 2007. That makes this a potential
Drug stores might benefit from the Affordable Care Act, which
will expand access to health care and could increase the number
of customers for pharmacies. RAD might also benefit from an aging
population since older people tend to use more prescription
Einhorn is not alone in buying RAD. The stock has an RS of 100
and has more than doubled in price since the beginning of the
Einhorn added RAD to his portfolio in the second quarter of
2013, the last quarter we have a full report of his activity for.
During that time, he was also buying
Spirit AeroSystems Holdings (NYSE:
This company supplies aerostructures to airplane manufacturers
and European Aeronautic Defence and
Space Company EADS (
, the maker of Airbus aircraft.
SPR is expected to see earnings grow at about the same rate as
BA, but SPR is significantly cheaper from a value perspective. In
2014, analysts expect SPR to report EPS of $2.59. The stock is
currently trading at about 9.2 times that amount. The expected
growth rate of 12.75% a year results in a PEG ratio of 0.72.
SPR is also a buy from a technical perspective. The RS rank is
66 and rising, meaning SPR has outperformed 66% of the market in
the past six months.
The monthly chart shows that SPR is near the upper limit of a
multi-year trading range. A breakout from that range points to a
price target of $35.48, which is about 50% above the recent
Action to Take -->
These stocks are market leaders and have been researched by one
of the best value investors in the markets right now. David
Einhorn rated these stocks as buys when he filed his most recent
report of holdings. All three are worth consideration by any
This article originally appeared at ProfitableTrading.com:
My Top 3 Picks From Billionaire Activist David
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