David Einhorn, the famous hedge fund manager, has returned as much as 21.5% annually to investors since his fund’s inception in 1996. Recently, he released the first-quarter shareholder letter for his firm, The Greenlight Capital funds. In the first quarter, the fund gained 5.8%, net of expenses. Einhorn considered the first quarter “a quarter of reversal.” Marvell Technology Group Ltd. (NASDAQ:MRVL), his biggest loser in 2012, turned out to be the biggest winner in the quarter, while Apple Inc. (NASDAQ:AAPL), a top-three winner in the past two years, was his biggest loser.
Marvell Technology: a cannibal with huge R&D spending
Einhorn owns more than 51.8 million shares in Marvell Technology Group Ltd. (NASDAQ:MRVL), accounting for 5.9% of his total portfolio at the end of 2012. In 2012, Marvell faced the legal challenges when the federal court fined the company for around $1.17 billion due to the infringement of two patents that was claimed to belong to Carnegie Mellon University. Thus, its share price took a dive to only around $7.20 per share at the end of 2012. However, this legal issue did not make Einhorn worry. He commented that the fine might be significantly reduced or eliminated. Interestingly, every Marvell Technology Group Ltd. (NASDAQ:MRVL) product is manufactured outside the U.S. and nearly 90% of its total sales is derived from Asian customers.
In the recent letter to shareholders, Einhorn stressed that investors began to take notice of the company’s prospects as the company was gaining more market share. Moreover, Marvell Technology Group Ltd. (NASDAQ:MRVL) has invested quite heavily on R&D activities to keep moving forward, delivering more value to its shareholders. In the past five years, Marvell’s R&D expenses accounted for around 24.85% to 33.37%. In 2012, the company spent more than $1 billion on R&D, accounting for 33.37% of the total 2012 revenue. In the middle of Feb, the company announced that it developed a new quad-core processor for both low-priced tablets and smartphones. Marvell’s PXA920 processor could be found on Samsung Galaxy handsets for China Mobile Ltd. (ADR) (NYSE:CHL).
What I like about the company is its self-cannibalization. In the quarter ending in February, Marvell Technology Group Ltd. (NASDAQ:MRVL) bought back around 34 million shares, with the total transaction worth more than $283 million. In the past 10 years, the company has reduced its total outstanding shares by around 27% by repurchasing 184 million shares in total. Marvell is trading at around $11 per share, with the total market cap of $5.5 billion. The market seems to value Marvell quite cheaply at only 7.76 times EV/EBITDA.
Apple is getting more shareholder-friendly
Einhorn became more bullish on Apple Inc. (NASDAQ:AAPL) as the price declined. In the first quarter 2013, Apple dropped from $532 to $443. Einhorn thought that the biggest problem about Apple Inc. (NASDAQ:AAPL) was its lower forecast. The analysts’ estimate for Apple’s earnings has been reduced from $64 per share last July to only $44 per share. However, what he likes about Apple was its “terrific operating platform, engendering a loyal, sticky and growing customer base that will make repeated purchases of an expanding AAPL product offering.” He praised Apple’s bond issuance move ($17 billion in bonds with the very low interest cost of around 2%) and Apple Inc. (NASDAQ:AAPL)’s announcement of returning $100 billion to shareholders by the end of 2015. He thought that this was a “dramatic shift” from where the company was just a few months ago. Einhorn revealed that he had added more Apple positions to his portfolio and waited for the release of its next blockbuster product.
Indeed, the commitment of returning $100 billion to shareholders via both forms of share buybacks and dividends has been welcomed by the general market. Since the middle of April, Apple Inc. (NASDAQ:AAPL)’s share price has moved up from $390.50 per share to around $453 per share. The share-repurchase plan was boosted by $50 billion to $60 billion while the dividend was raised by 15% to $3.05 per share. However, Apple does not have to repatriate its cash back home. It would rather issue bonds at the very low cost. A six-part bond issuance was priced at the fixed-rate yields of 0.511% to 3.883%.