In 2013, David Einhorn (Trades, Portfolio) of hedge fund Greenlight Capital returned 19.1%, lagging the S&P 500’s return of 31.55%. The value-oriented investor is no stranger to a stray underperforming year, however, on his way to achieving a 19.5% annualized return over the long run since his firm’s inception in 1996.
Some of Einhorn’s undervalued stocks have yet to appreciate or overcome their short-term setbacks that have rendered negative reputations in the market, presenting low P/E opportunities. He bought two new low-P/E stocks in the fourth quarter.
New Low-P/E Buys
David Einhorn (Trades, Portfolio) bought 980,000 shares of BP Plc in the fourth quarter, when the price averaged $46 a share. He owned the stock previously, beginning in fourth quarter 2010, after its P/E sunk to record lows and then ceased existing due to lack of earnings. Its price at that point was also coming up from record lows. He sold out in third quarter 2011, when BP’s average price was about even with his purchase price average.
The new position composes 0.65% of his portfolio. The P/E of PB in the fourth quarter was around 6, and stands at 6.5 on Thursday.
BP P/E history:
Einhorn commented on the stock in his fourth quarter letter as follows:
“We established a position in BP (BP) at an average price of $47.39. The Deepwater Horizon oil spill was nearly four years ago. Since then, investors have focused on the ensuing legal cases regarding clean-up and restitution efforts, while overlooking BP’s improved return on capital in its core businesses. Allowing for more negative legal outcomes than BP has currently provisioned, we believe the company’s net asset value (NAV) is nearly $70 per share. It can therefore create substantial value by selling assets at or above NAV and using the income to repurchase stock at a significant discount. This is exactly what BP has been doing. Further, BP has restricted capital expenditures and increased dividends – all evidence of a more shareholder-friendly approach. As the legal issues subside, we expect the market to appreciate BP’s portfolio value and its improved capital allocation. In the meantime, we own an industry leader at 9x earnings with a 5% dividend yield. BP shares ended the quarter at $48.61.”
BP’s return on equity and return on assets have indeed bounced back from their negative range in 2010, to 18.14% and 7.67%, respectively, in 2013. In the fourth quarter, revenue and net income fell slightly year over year. BP’s revenue was $95.1 billion versus $99.8 billion, and net income was $1.04 billion versus $1.49 billion. Results were lowered by divestments and increased depreciation and exploration write-offs.
The company also announced that it spent $6.8 billion repurchasing shares from March 2013 to Jan. 31, 2014, out of its $8 billion share buyback program. By 2015, it expects to divest $10 billion in assets and use the majority on share repurchases and other shareholder distributions.
BP on Thursday is trading around $47.69 per share, close to a three-year high. It has a P/S ratio of 0.38, which is near a two-year high, and a P/B ratio of 1.2.
Take-Two Interactive Software Inc. (TTWO, Financial)
In the fourth quarter, Einhorn took another slightly larger position in a slightly higher P/E stock: Take-Two Interactive Software Inc. (TTWO, Financial). He purchased 4,163,272 shares in the fourth quarter, when the price averaged $17, for a 0.99% portfolio weight.
Einhorn purchased Take-Two near a five-year high price. It has a P/E of 7.6, its lowest point in several years, when the company has earnings, and lower than 97% of the companies in the Global Electronic Gaming & Multimedia industry:
Take-Two Interactive is a New York-based video game development company which created such names as Grand Theft Auto V and NBA 2K14. For its fiscal third quarter, Take-Two announced net revenue of $1.86 billion, up from $415.8 million in the year-ago quarter. Net income reached $578.4 million, increased from $392.4 million. The company ended the calendar year with cash of $972.2 million.
Take-Two also repurchased 16.24 million shares, including 12.02 million repurchased from Carl Icahn (Trades, Portfolio)’s company, at a cost of $276.8 million.
For fiscal 2014, the company has raised its revenue and earnings outlook to record levels, based on its pipeline of games.
Take-Two’s revenue and earnings history:
The company trades at a P/B ratio of 2.3, and P/S ratio of 1.
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