Greenlight Capital’s David Einhorn (Trades, Portfolio) discussed some of his favorite stock picks in an interview at the 11th Annual Great Investors’ Best Ideas Investment Symposium in Dallas on Tuesday.
The annual conference is a high-priced fundraiser benefiting the Michael J. Fox Foundation for Parkinson’s Research and the Vickery Meadow Youth Development Foundation. In the past, other well-known investors like Bruce Berkowitz (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and T Boone Pickens (Trades, Portfolio) have pitched several stock ideas to attendees.
During his interview, Einhorn discussed stocks in his “bubble basket,” which are companies he feels are overvalued. Among these stocks is Tesla Inc. (TSLA, Financial), in which he has a short position.
New York Times editor Gretchen Morgenson, who moderated the interview, touched on the Model 3 production delays the company had just announced. She asked if he felt the company’s failure to meet its production targets was “the beginning of a reckoning” for Tesla’s stock.
“No,” Einhorn replied. “I don’t know whether it is going higher or going lower; I think that it is going lower. I doubt the production issue here is key to the Tesla story for anybody who has been paying attention to what it is these guys are peddling.”
Einhorn expounded on the premise of the bubble basket.
“When we sell companies short, we don’t just short on valuation,” he said. “We prefer situations that are both overvalued and deteriorating, and we think we have a big difference of opinion about what is going on in the market in relation to a particular company.”
Since value investing has fallen out of favor in the past several years, he said, the true value of many stocks has skewed as the market is wrestling with what to base a company’s valuation on: what is popular or what is actually profitable.
“Our theory is that sooner or later traditional thinking will come back into play,” Einhorn said. “And we will do very well by being short a good number of these companies that not only have no profits now but have no reasonable chance to achieve risk-adjusted profits that in any way, shape or form resemble market capitalizations.”
Morgenson also asked him about a recent letter he wrote criticizing the comparison of Tesla to Apple Inc. (AAPL, Financial) and Elon Musk to Steve Jobs.
“The market believes that when you sell an iPhone, you have sold exactly one iPhone, and you have whatever that profit is and the customer is not going to come back because in two years or three years, maybe they will buy a Samsung (XKRX:005930, Financial) phone or a Microsoft (MSFT, Financial) phone or a Google phone or somebody else’s phone," Einhorn said. "What the market has missed is there is an ecosystem around Apple. When you buy a phone, you are actually making Apple better because you are bringing more developers who create more apps, which makes the phones more valuable. “
He went on to say that since the company is always improving its technology, consumers are more likely to return to that same brand, which makes the sale of one iPhone expand and indicates it as a consumer brand. This ecosystem then spreads to its other products and services.
Einhorn said Tesla does not have this same ecosystem.
“When you talk about the cars, there is no real network effect,” he said. “When you buy a Tesla car, there is exactly one more Tesla car on the road. And Tesla has made whatever profit they have made in selling you that car, and that is just kind of it.”
Einhorn confessed he owns a Tesla and thinks it is terrific. But he thinks the company lost $20,000 to $30,000 selling it to him. He said the company has not yet figured out how to make its cars profitable on a unit basis. The more cars it makes, the bigger its losses.
He also emphasized that while it is aggressive in its product portfolio and capital structure, it is taking the biggest risks in each part of its business.
“It is a hugely levered company so even though they have almost free equity, which should be a capital advantage to them, they sit there and issue bonds and convertible bonds and secured debt related to their solar business and leases on their cars.”
As a result, the company has a compounding level of risk.
In regard to Musk versus Jobs, he said that while Jobs had a group of loyalists to help build Apple, there is a lot of management turnover at Tesla.
In regard to General Motors Co. (GM, Financial), Einhorn said that he recommends buying the stock despite trimming his position.
“As the price has been rising recently, we have been reducing our position,” he said. “It is still a max position, but as it goes up we have to trim it.”
He reiterated GM is still, by far, Greenlight’s largest position.
For a new idea, Einhorn pitched Tempur Sealy International Inc. (TPX, Financial), the manufacturer of Tempur-Pedic mattresses, which he recently bought.
“They got into a fight with the largest mattress retailer in the country earlier this year, which is called Mattress Firm (MFRM, Financial),” he said. “Mattress Firm bought their mattresses from Tempur for a discount and they wanted a bigger discount. The two companies fought, and Mattress Firm threw them out so that was the end of that distribution.”
As a result, both stocks went down.
It was soon discovered, though, that consumers want the Tempur-Pedic name. Since Mattress Firm is no longer carrying the brand, consumers went elsewhere to find it. So Tempur has been able to fill the gap left by Mattress Firm through other channels.
Meanwhile, Mattress Firm’s sales have fallen significantly due to this decision.
Einhorn said the market has not caught on yet, but Tempur is selling to another part of the channel at a higher price than Mattress Firm paid. While it is losing a few units, it is making more money for each mattress sold.
Based on projected earnings targets and a management compensation bonus plan, Einhorn said he believes the company is set to surpass Wall Street and grow in profitability.
“I think we will have a near-term surprise based on replacing more business faster and higher margins,” he said. “I think eventually they have a plan to get to much higher earnings and, finally, I think there is a reasonable chance Mattress Firm has to come back to them sometime in the near future.”
Disclosure: I do not own any stocks mentioned.
