Cheap Stocks in Einhorn's Basket

 | May 24, 2013 | 2:00 PM EDT
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As part of our work researching investment strategies, we track quarterly 13F filings from hundreds of hedge funds -- and we have found, for example, that the most popular small-caps among hedge funds annually outperform the S&P 500 by 18 percentage points on average. We can also screen top managers' picks for stocks that, say, satisfy the traditional value criteria of low earnings multiples.

With that in mind, let's go take at the five cheapest large holdings in Greenlight Capital, run by billionaire David Einhorn -- one of the most closely followed hedge-fund managers in the world. More specifically, these are Greenlight's largest positions as of the end of March that sport trailing and forward price-to-earnings ratios of 12x or lower.

First off, Einhorn was buying Apple (AAPL) between January and March, and Greenlight closed the first quarter with 2.4 million shares, or $1.1 billion worth. Apple is currently valued at 11x trailing earnings, even with a large share of its market capitalization comprising cash. That's because markets are pricing a continued stock decline into the company's net income. A plan to return more cash to shareholders has brought Apple's dividend close to 3%, and the company has a sizable share-repurchase authorization in effect. All in all, we think the company is still worth further research.

Greenlight also reported a position of more than 21 million shares in General Motors (GM). Wall Street analysts are projecting strong earnings numbers for GM over the next several years, and the stock isn't too expensive as things stand -- its trailing P/E is 12x, which results in a five-year P/E-to-growth (PEG) ratio of only 0.6. While the first quarter actually wasn't very good for this company -- revenue slipped a bit vs. a year earlier, and net income was down by 10% -- the stock still looks like a potential value play. However, the same could be said for other automakers. (Warren Buffett, by the way, has the largest position in GM among the 500 hedge funds we are tracking.)

Aetna (AET) was another cheap stock pick from Einhorn and his team. Greenlight has been a fan of health insurers generally, counting both Aetna and Cigna (CI) among its five largest holdings by market value. Aetna, whose shares trade at 10x estimates, saw revenue rise 7% year over year last quarter, though net income was actually down slightly. The industry, similar to auto-related companies, does appear to be fertile ground for potential value stocks. We'd encourage investors to compare Aetna with its peers.

Meanwhile, the fund cut its stake in Computer Sciences (CSC) by 23%, but it still owned 5.9 million shares at the beginning of April. The information-technology name has seen its stock rise by close to 70% in the last year, yet it remains in value territory: It has a forward P/E of 11x, based on the analyst consensus for the fiscal year ending in March 2015. That does assume a significant shrinkage in the company's business, and in fact revenue has been down, so it would be wise to further investigate whether the sell side is being too optimistic there.

Finally, Greenlight owned 5.4 million shares of data-storage name Seagate Technology (STX) at the end of March, though this is another position it had been selling during the first quarter. Seagate sales dropped more than 20% in its most recent quarter, compared with the same period in the previous fiscal year, thus causing an even steeper drop in the bottom line. Analysts expect the decline to moderate a bit, and the forward P/E is low at 8x. Seagate pays a dividend yield of 3.7% at current prices. Of course, at the same time, the recent financials indicate that Seagate is something of a higher-risk value play.

-- Written by Matt Doiron

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