“The disappointing fourth quarter result reduced our year from good to pedestrian,” Greenlight admitted. “While it is hard to view our performance last year as a catastrophe, it nonetheless falls short of our goals.”
Greenlight Capital lost 4.9 percent in the fourth quarter of 2012, which lowered its year-to-date net return to 7.9 percent. By the end of the year, the fund disclosed Apple (AAPL), Cigna Corp. (CI) General Motors (GM) Gold and Vodafone Group (VOD) as its largest long positions.
All but one of Einhorn’s high conviction stocks listed in GuruFocus’ conviction picks feature, were mentioned in the shareholder letter.
General Motors Co. (GM)
GM was an overall hit for Greenlight Capital’s fourth quarter.
The fund started 2012 by shedding 22.07 percent of its stake in the company in the first quarter. However, it eventually bought back the shares later on in the year as it increased its stake by 17.64 percent in the second quarter, and 23.84 percent in the third quarter.
Currently, Einhorn holds about 21.6 million shares of General Motors. The company trades today at $28.87, up 1.05 percent. Although GM is priced relatively lower from Einhorn’s initial average purchase price of $34.98, the stock has been showing upside.
Greenlight’s long position in GM was marginally profitable in the fourth quarter, as it advanced from $22.75 to $28.83, according to the shareholder letter.
Greenlight appears optimistic in GM’s management decisions lately, especially after GM was reported repurchasing 11 percent of its shares from the government, committing to sell the balance of its stake over the next year.
“GM’s reduced share count is quite accretive to its earnings, and we hope that the recent action is a first step by management toward shareholder-friendly capital allocation,” Greenlight noted.
The fund rewards GM some points for this move, for the fact that it polishes shareholder appeal, furthering opportunities for rewards.
For the November and December months, GM’s sales rose 3 percent and 5 percent, respectively. Its retail volume was up 38 percent in the last month of the year, from just the previous month.
In December, GM also became the first US automaker to sell more than 1 million vehicles in a single year that get an EPA-estimated 30 mpg or higher on the highway, according to a company news release.
GM will pay a dividend of $0.59375 per share on March 1. The dividend is out of GM’s Series B mandatory convertible junior preferred stock. The total amount of the dividend is approximately $59.4 million.
Marvell Technology (MRVL)
Einhorn’s second conviction pick last year was Marvell Technology Group Ltd., a semiconductor company, whose products include high-performance processors, storage controllers, LED processors and broadband and wireless transceivers.
For Greenlight Capital, Marvell was a straight miss throughout the entire year of 2012. Over the quarters, shares fell from $13.85 to $7.26, although it did not seem to faze Einhorn, who continued to add to his stake with high conviction, not reducing once.
Einhorn purchased about 16.64 million shares of Marvell in the third quarter of 2011 for $14 per share on average, and increased the position by almost 1 million shares in the next two quarters. In the second quarter of 2012, he made his second largest purchase of the company to date of more than 7 million shares, bringing his total holding to over 25 million shares.
Currently, he sits with over 32 million shares, after he increased again in the third quarter.
Einhorn’s predictions about Marvell have not all been completely in the wrong. For instance, in 2011 he was right about the company diversifying its client base, while other investors showed concern when they found out that Research In Motion (RIMM) was at the time, Marvell’s largest customer. Marvell’s naming of Western Digital as its largest customer in the 2012 fell right in line with Einhorn’s prediction.
Driven by a legal battle gone awry, Marvell’s shortcomings in fourth quarter still has not caused Einhorn to lose complete hope.
“Though we’d love to just admit we are wrong, sell the stock and move on, we continue to like the opportunity here,” Greenlight said. “Marvell is on the cusp of a large production transition…We have re-evaluated and decided to buy even more MRVL. We expect its shares to sprint higher in 2013.”
Marvell trades at $9.10 today, down 2.31 percent.
Computer Sciences Corp. (CSC)
Based in Falls Church, Va., Computer Sciences Corp. provides technology-enabled business solutions to its clients.
In 2012, Greenlight added to its stake in Computer Sciences in the second quarter by 50.92 percent, and again the third quarter by 89.57 percent. This was after purchasing the stock in the first quarter at $27.03 per share on average.
A change in management was what spurred Einhorn to get a hold of the stock in February 2012, after the company’s 50 percent decline the previous year due to deteriorating profitability and problems with one of its business contracts, according to the shareholder letter.
Computer Sciences turned out as a gain for Greenlight in the fourth quarter, as the company increased by almost 60 percent in market value in the last year.
For the past 10 years, Computer Sciences Corp. exhibited a revenue growth rate of 5.4 percent and a free cash flow growth rate of 3.7 percent.
Greenlight views the company as a “fundamentally sound business” that has merely suffered due to inefficiencies within its organization, mismanagement in its history and charges that obscured its underlying earnings.
Remaining confident in the company to continue its 2012 improvement streak, Greenlight shares:
“While the stock has appreciated in response to management’s progress to date, we continue to believe that the company has significant opportunities for margin improvement, free cash flow conversion and capital deployment under the leadership of its well incentivized and shareholder-friendly management team.”
DST Systems Inc. (DST)
Einhorn’s final conviction pick last year was information processing and software services company, DST Systems Inc.
After acquiring DST in 2011, Greenlight Capital increased its stake in the company throughout 2012, until it reached more than 2 million shares as of Sept. 30.
Although Greenlight made no mention of DST systems in its fourth quarter letter, the stock, which is 1.9 percent of the fund’s portfolio delivered 32.91 percent in gains last year. So overall, this conviction pick was a win for Einhorn in 2012.
Headquartered in Missouri, DST’s information processing solutions and services support the global asset management, insurance, retirement, brokerage and healthcare industries. In addition to technology products and services, DST also provides integrated print and electronic statement and billing solutions.
In the past 10 years, DST’s revenue growth rate was 11.4 percent, and its EBITDA growth rate was 10.7 percent, according to its 10-Year Financials.
Currently, the stock trades at $65.49, a couple of points away from its five-year high of $74
See David Einhorn’s stock holdings in his portfolio here. Also check out his Undervalued Stocks, Top Growth Companies and High Yield stocks,