David Einhorn Second Quarter Letter: Exit Dell, BestBuy, Buys Cigna and Coventry Health Care
These are some excerpts:
It is hard to blame the current European leaders for their inability to solve a crisis that has no real solution. Even the very best options range from awful to awful, so no one should be surprised when the political choice is “None of the above. Let’s put out a communiqué and hope that no one notices.” This remedy of, “Take one aspirin and call us in the morning – or, better yet, after our August vacation,” offered the market some welcomed pain relief, but the rally lasted about as long as it takes to metabolize an aspirin.
Some believe that Germany could alleviate the problem by simply whipping out its checkbook. Setting aside the likely German distaste for doing so, a simple analysis of Germany shows that its own fiscal situation isn’t so rosy, particularly if it is also headed toward recession. Were it to try to bail out its neighbors, there is the risk that they would all sink together. Germany already has its own fiscal commitments, and its economy is simply not big enough to bail out the rest of Europe.
Much to its chagrin, Germany doesn’t have the option of walking away either. The recent huge influx of deposits into “safe” German banks only serves to exacerbate the problem. The German banks don’t need the money, so they park it at the Bundesbank, which in turn lends it via the ECB back to the local banks that are losing deposits in Europe’s periphery. Essentially, the bank runs also shift the credit risk of peripheral banks from the local depositors to the Germans. While the Germans kick and scream about not wanting to take on credit risk through Eurobonds, they are already taking on similar risk through the banking system.
The Partnerships established several substantial new positions in the managed care sector, including Cigna (CI) and Coventry Health Care (CVH). The entire sector had been battered in anticipation of Obamacare. For the most part, these companies have unlevered balance sheets and trade at single-digit P/E multiples on earnings that should continue to grow. They have no exposure to the European currency crisis, a possible Chinese slowdown or other cyclical headwinds. While the stocks are already cheap, there is the additional unpriced upside in the possibility that the election changes the political landscape, resulting in a possible modification or repeal of Obamacare.
Read the complete letter.