We just wrote an article about David Einhorn’s amazing stock picks at the Ira Sohn Conference. His long pick, Apple, gained 8.9% including today’s performance and his short pick lost 5.4% since then. Bill Ackman is another high profile hedge fund manager with a great track record. However his track record with his Target (TGT) investments isn’t great. So, we were really cautious about his gigantic bets on JC Penney (JCP) which were initiated almost 2 years ago when the stock was trading around $20-25 per share. After Ackman disclosed his bet, the stock price jumped above $30 and stayed there for a very long time.
Unfortunately JC Penney’s recent experiments aren’t very successful. The stock closed at $33.32 the day before Bill Ackman pitched JC Penney as his best long idea. The stock lost 35% since then. Bill Ackman’s investors’ paper loss is around $450 million. Sometimes hedge fund managers think that they have superpowers and they can do anything if they put their minds to it. That usually ends up in disappointments. Ask Phil Falcone. We don’t like to imitate hedge fund managers when they try to play CEO in a highly competitive industry. JC Penney wasn’t a misvalued security where you can split the company into two and unlock some of the hidden value. JC Penney simply couldn’t compete in a highly competitive industry.
On the other hand Apple (AAPL) doesn’t get any respect from investors despite its huge competitive edge. David Einhorn noticed this and invested in this stock when it was trading around $250. Today the stock is nearly $600 and still trades at a single digit forward PE ratio excluding its cash. This is a situation where we like to imitate a successful hedge fund manager. The stock is cheap, it is highly competitive and driving several established players (like RIM, Nokia, HP) out of the market. That’s why Einhorn is performing better than Ackman at the moment.