Greenlight Capital, managed by David Einhorn, did not do so well in the fourth quarter of 2012. The fund returned negative 4.9%, net of fees and expenses, dragging the year-to-date net return to 7.9%. Einhorn showed his bullish attitude towards several companies, including Apple Inc. (NASDAQ:AAPL), Marvell Technology Group Ltd. (NASDAQ:MRVL) and CIGNA Corporation (NYSE:CI). Let’s have a look into the companies that Einhorn likes.
A Value Stock
As of September 2012, Apple was the biggest position in his portfolio. With more than 1 million shares, Apple accounted for 12.2% of his total portfolio. Apple closed the first quarter 2013 with a quite strong balance sheet. It had $16 billion in cash, $23.7 billion in short-term marketable securities, and nearly $97.3 billion in long-term marketable securities. The cash, short-term, and long-term marketable securities combined were more than $137 billion. Subtracting that from the market capitalization of $436 billion, Apple is priced at around $300 billion, valued at 5.12x EV/EBITDA. Thus, Einhorn continued to be bullish on Apple in a long run.
Good Opportunity if the Patent Fine is Low Probability
Marvell Technology was his 6thbiggest position, representing around 5% of his total portfolio. Marvell’s share price dropped significantly, from $16.73 per share in February 2012 to only $7.57 per share in the beginning of January. I have been wrong about Marvell Technology in the short-term when not expecting the share price to decline further. Since then, Marvell has advanced to $9.31 per share, marking a 25.8% gain. The previous drop of Marvell was due to a patent fine of $1.17 billion. The patent fine could potentially go up to as much as $3.5 billion. If that were the case, it could wipe out more than 70% of the company's current total market capitalization.
David Einhorn thought that the case was a “novel interpretation of the law by a local judge, combined with a hometown runaway jury.” He believed that the award would be substantially reduced or eliminated. He wrote in the fourth quarter letter to shareholders: “There are many grounds, but one of the simplest is that most of the damages were awarded based on foreign sales that are generally not protected by U.S. patents. The jury found that since the product was “designed and tested” in the U.S., damages were payable even though the manufacturing and sales happened abroad.” At the current share price of $9.31 per share, Marvell's total market capitalization is nearly $5 billion. The market is valuing the company at 5.92x EV/EBITDA.
A Play on HealthCare
Cigna was reported to be one of the biggest long positions in Einhorn’s portfolio at the end of the fourth quarter. In the third quarter, it was the fourth largest position, accounting for 5.6% of the total portfolio. Cigna is a global health services organization with insurance businesses for medical, life, disability and accidents. The majority of its net income was generated from the Health Care segment ($991 million), accounting for 74.6% of the total net income in 2011. Einhorn commented that in order to understand Cigna, investors should understand Heath Maintenance Organizations, ObamaCare, and how it would affect Cigna. He believed that Cigna was the best performer compared to its peers due to its secular growth, high ROE, and high barriers to entry.
Compared to other peers, including Aetna (NYSE:AET) and UnitedHealth (NYSE:UNH) Group, Cigna had the strongest quarterly revenue growth, the highest gross margin, and the highest operating margin. The quarterly revenue year-over-year growth was 31%, whereas UnitedHealth had only 11% growth. Aetna’s revenue grew the least with only 5% growth. Aetna and UnitedHealth’s gross margins were 29% and 27%, respectively, over the past 12 months, whereas Cigna’s gross margin was as high as 40%. The operating margin of Cigna was also highest at 10%. Aetna and UnitedHealth had been just a bit lower with 9% and 8%, respectively.
Foolish Bottom Line
Apple seems to be an intriguing stock for value investors, with debt-free operations, huge cash on hand, and low EV multiples. Marvell is also a decent stock to hold if the patent lawsuit doesn’t dampen the company's prospects. For Cigna, investors with sufficient healthcare knowledge should dig deeper to decide whether it is suitable for them or not.
The article Stocks That David Einhorn is Bullish About (Part I) originally appeared on Fool.com.
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