In November, Greenlight Capital released its 13F filing for the third quarter of 2012, which disclosed many of its long equity positions as of the end of September. Greenlight is managed by billionaire David Einhorn, who is one of the most widely followed investors in modern times due to the fund’s strong returns and the frequent success of his public investment recommendations (perhaps most famously, his short of Green Mountain Coffee Roasters in October 2011). See Einhorn's recent stock picks. We like to look not only at a hedge fund’s largest positions, but also to see what new stocks it has been buying that it hadn’t owned in its last quarterly filing. Here are Einhorn’s three new picks from the third quarter of the year:
Greenlight initiated a position of 5.1 million shares in Yahoo! Inc. (NASDAQ:YHOO). Billionaire Dan Loeb’s Third Point actually added shares of Yahoo during the quarter, suggesting that the fund didn’t consider itself done after its activism led to the ouster of Yahoo’s former CEO and his replacement by Google Inc (NASDAQ:GOOG) employee Marissa Mayer. Check out more stocks that Dan Loeb has been buying. Yahoo currently trades at 16 times forward earnings estimates, which actually represents a premium to Google’s forward P/E multiple of 15. We’re not sure that is a good valuation; even with Google struggling to profitably integrate its acquisition of Motorola Mobility Holdings, that company has a better brand than Yahoo. It also does have better market position in high-growth areas such as smartphones and tablets, regardless of how the Motorola acquisition turns out, and so it likely has better business prospects as well. We can also compare Yahoo to Microsoft Corporation (NASDAQ:MSFT), which trades at only 8 times forward earnings estimates. Even with earnings projections carrying a temporary boost due to new versions of Windows and Office, and with reports beginning to come out that both Windows 8 and the Surface tablet may be seeing disappointing sales figures, we’re not sure that it makes sense for Yahoo to be trading at such a large premium. Either Google or Microsoft looks like a better investment here (we’d note that Microsoft is actually one of Einhorn’s top ten stocks).
Babcock & Wilcox Co (NYSE:BWC), a $3 billion market cap machinery company providing power generation systems to utilities and the U.S. Navy, was another of Einhorn’s new picks. Greenlight reported owning about 860,000 shares. In its most recent quarter, the company experienced an 11% decline in net income despite rising revenue. Its stock actually looks well priced at a trailing P/E multiple of 14, though we’d need to investigate why its margins are down and check to see that it can at least maintain its current net income in the future. Glenview Capital, managed by Larry Robbins, increased its own holdings of the company during the third quarter and closed September with 5.5 million shares in its portfolio (find more stock picks from Glenview Capital).
Greenlight also bought shares of professional services company AECOM Technology Corp (NYSE:ACM), which provides engineering and management consulting services. This was another small holding, at about 780,000 shares, but it’s still fairly significant that Einhorn and his team developed enough confidence in the stock to initiate a position. The company has been struggling recently, with revenue down slightly in its most recent quarter compared to the same period in the previous fiscal year, but the sell-side is optimistic about its prospects: the forward P/E is only 8, and the five-year PEG ratio is 0.6. Given that Greenlight has likely evaluated the company in detail and considered it a buy, we think that its valuation could be cheap but we’d have to take a closer look and certainly wouldn’t rely entirely on the fund’s judgment (particularly as AECOM is only a small portion of the portfolio).