The following is an analysis of the most current portfolio of David Einhorn. This analysis will use a system that I designed that is based on the ratio that Warren Buffet released to the public in 1986, which he coined “Owner Earnings.” For those new to this type of analysis, I would recommend reading an introduction to my system by clicking here.
My goal is ultimately to analyze the portfolios of each Guru highlighted here on GuruFocus, and to subsequently re-analyze them every quarter when possible as changes are made. My purpose in writing these articles is to show the power of Buffett’s ratio in analyzing stocks, ETFs, Mutual Funds and individual portfolios. If one can fill their portfolios with companies that score high using my system and avoid those which fail, one should be able to increase the probability of becoming a successful investor in my opinion. Profile of Einhorn:
David Einhorn is president and co-founder of Greenlight Capital, a long-short value-oriented hedge fund, which started with $1 million under management in 1996. Over the ensuing years, Greenlight has generated greater than a 21 percent annualized net return for its partners. Einhorn is chairman of the board of Greenlight Capital Re Ltd. (GLRE) and serves on the boards of Hillel: The Foundation for Jewish Campus Life, The Michael J. Fox Foundation for Parkinson’s Research, and the Robin Hood Foundation. Einhorn graduated summa cum laude with distinction in all subjects from Cornell University, where he earned a B.A. from the College of Arts and Sciences.
Einhorn is considered by many to be one of the best investors around, so let’s see how his portfolio does:
Einhorn's portfolio at first glance is heavily weighted towards the technology sector and you can see that by going to GuruFocus’ valuable tool called the sector weighting page by going here. It’s amazing how many tools the GuruFocus site has and though I have been a premium member for some time now, I always enjoy seeing the new improvements they keep making to the site. On that sector page you can see that he is 31% in technology. I imagine that his two largest holdings, Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL), make up a large chunk of that weighting.
If you want to see how he traded both of those holdings over the years, just click on the “history” button on his trading history and you will see that he did alright with Microsoft during some rough market conditions and turned a potential serious loss into a nice gain. I started using that button when I was studying the trades of Guru Bruce Berkowitz in American International Group (AIG), Sears Holdings (SHLD) and Bank of America (BAC) and I am amazed that Berkowitz has any clients left in his fund after making such trades, as I know I would have lost all mine had I made those same trades.
Just using Sears for example, Berkowitz has over 16.2 million shares of Sears Holdings at an average cost of $94.02 a share, which means he paid about $1.522 billion for those shares. When Sears released their restructuring recently the stock had this happen to it.
Berkowitz thus took around a $1 billion haircut on that Sears trade and his $1.522 billion investment became about $502 million after the stock cratered. Back on Nov. 4, 2011, Value Line issued a report and under the 2011 column for Sears Holdings it clearly showed that Sears Holdings was expected to lose $-1.35 a share or $-144 million dollars for 2011. When I see that a company I own is losing money, the first thing I do is run for the exits, as I learned over the years that as a value investor you never know how far the falling knife will go before it hits something and the last thing you want to do is try to catch it. I don’t know how Berkowitz sleeps at night with those investments he owns.
Einhorn on the other hand is more conservative and when he thinks that the reason he bought a stock has changed, he gets out right away as he proved with his Yahoo (YHOO) investment in 2011. You see the secret to being a successful investor is to minimize your losses and maximize your gains. Buffett has two rules of investing and they are:
1) Never Lose Money
2) Never Forget Rule No. 1
Einhorn seems to follow those two rules as he has beaten the S&P 500 Index seven years in a row. You don’t do that by betting the farm, but you do so by getting out of Microsoft in 2008 at $26.48 and then by buying it back in 2009 at $17.99 as Einhorn did.
His non-financial portfolio contains 32 stocks and clearly shows that he is a big fan of “Owner’s Earnings.” He scored a 1 for CapFlow in 19 (59%) of his holdings and scored a 1 with Price to Owner Earnings with 21 (66%), so he definitely uses owner earnings in his work. His only weakness is with FROIC where he only scored a 1 with 8 (25%) of his holdings. Thus we have to classify Einhorn, the same way that we did Wallace Weitz and Zeke Ashton in our previous guru articles, as a classic value investor. I truly believe that if more attention was paid to FROIC by value investors that their performance would be greatly enhanced.
So now that we have our data let’s see how Einhorn ranks among the other gurus that we have analyzed. His portfolio has a total average score of 1.50, therefore this is how he ranks. The final score is a non-weighted average of each portfolio’s total score divided by its total non-financial holdings.
The reason Einhorn scored a 1.50 is because he has investments in gold and oil stocks. Gold and oil companies require a lot of capital spending and usually have very low owner earnings results. The smaller capitalization names in his portfolio also did not do well and for the life of me I am left scratching my head as to his investment in Sprint (NYSE:S), as that company seems to me to be going the way of Eastman Kodak (EK). Sprint has had massive losses and a spiraling book value and is way too much in debt. I learned by studying Mr. Buffett’s investments going back to his Blue Chip Stamp days that when your capital spending is greater than your earnings, you have a serious problem on your hands. In Sprint’s case you not only have large capital spending but you are also losing money every year. Sprint’s purchase of Nextel and its partnering with Clearwire (CLWR) demonstrates some really poor judgment on behalf of management and I think with both Sprint and Clearwire now selling in the $2 range, you may see a race to the bottom as well as both stocks being delisted from the markets. But then again maybe Einhorn sees something that I don’t see in Sprint.
Disclaimer: Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment adviser, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.
About the author:
From his work on free cash flow in the investment process, Mycroft has now decided to bring his theories to the field of money management as well as work as an independent consultant for Hedge Funds, Pension Funds and ...More Institutions in general. His dream is to someday soon open a mutual fund where he can help as many people as he can benefit from what he has learned over the years.