Stock Ideas Shared By Einhorn and Loeb: CIT Group Inc., Health Net Inc., Energy Partners Ltd., BioFuel Energy Corp.

(GuruFocus, March 8, 2010) Hedge fund managers Daniel Loeb of Third Point and David Einhorn of Greenlight Capital have similar traits:

• Both are in their 40’s and both manages billions with good track records.
• Both use long/short strategies in their money management.
• Both have a relatively concentrated long portfolio
• Both are outspoken about the companies in which they have a position in, especially if it is a short position.

GuruFocus made available their 4Q09 Quarterly letter available to non-investors (Read Einhorn’s letter here and Loeb’s letter here) .


Investment Outlooks


Both Einhorn and Loeb provided their investment outlook in their respective letter.


Einhorn sounded a bit more cautious in the letter:

In reflecting on how much has changed in the last decade, we have come to realize that many things that appear unthinkable can easily occur within a ten-year timeframe. The range of possibililities for the next decade appear terribly wide. It is possible that the recent government sponsored stimulus could propel a global revovery, creating a virtuous circle of prosperity such that when we look back at the financial crisis of 2007-2009 it will fade into the history as a speed bump, like the market crash of 1987. It is also possible that this is the decade when we will re-learn that sovereign government don’t have unlimited credit worthiness and long-term problematic demographic trends will limit economic growth, creating potentially unsolvable proboclems for indebted nations that have undeliverable obligations to aging populations.

In response, Einhorn stays on the conservative side, as he put it in the letter:

The portfolio continues to be conservatively postured into 2010 because the market appears to be discounting a rather rosy outcome. In any case, out long portfolio is for the most part invested in stable, less cyclical businesses. We continue to be short businesses that should be fundamentally challenged, especially in a difficult economic environment.

Loeb, on the other hand, is more upbeat but also cautious:

We are relatively constructive about markets generally in light of modest valuations, accommodating monetary policy and economic data which suggest growth from the precrisis lows. However, against this backdrop remain numerous issues that weigh on sentiment, creating opportunities for investors, but presenting real risks to robust economic recovery. Among the issues we track that have the potential to create market dislocations are:

• US government deficits at the municipal, state and federal levels, including entitlement liabilities, and their impact on inflation, interest rates, and growth
• Unwise US regulatory intervention
• European sovereign default risk weighing on the Euro
• Middle Eastern defaults
• Japanese fiscal/demographic crisis
• Chinese economic growth, credit quality and currency volatility
• “Peak Oil” impact on geopolitical stability and economic welfare
  
  
• Climate change

Accordingly, since it is difficult to predict which of these "monsters in the closet" will reveal themselves and when (just as it was difficult to predict when the sub”prime crisis would come home to roost), it is important to continually monitor each of these risks, even as event”driven, bottom”up investors. Unlike the subprime debacle, where it was possible to set up bearish bets even after the market started to fail, I am concerned that many of the issues we monitor today could unravel quickly in a step function. We have begun to set up various trades to hedge against "fat tail risk", as we did early in 2009. While we have only a small percentage of capital at risk in such protective trades, we expect to increase the amount of protection purchased to about 2% per annum over the coming weeks and months – capital we would be very pleased to lose should such protection prove unnecessary.


Notwithstanding a challenging start to the year, with markets flat as of this writing, we have found ample opportunity within our investment framework to exceed market returns and to meet our partners’ capital gains needs. In particular, distressed credits and postreorganization equities, special situations and certain short positions are doing well. We have also avoided many consensus trades, including cyclical and commodity stocks, gold, Chinese and other emerging markets, all of which were terrific performers for other funds last year but do not meet our framework or qualify as part of the knitting we do best and to which we are sticking.


While immediate opportunities in corporate performing credit have waned, we are seeing a strong surge in corporate M&A activity, which produces investment possibilities directly in risk arbitrage investments and sometimes around the fringes, as noted above. While we have taken down our exposures since their peak in mid”January, we like our portfolio and remain excited by the new event”driven situations we are seeing every day.

Shared Stock Ideas


None of the two Investment Gurus has to report their short positions, but GuruFocus has a good view of their long equity positions:


As of December 31, 2009, Einhorn invested $2.94 billion among 41 stocks and Loeb invested $960 million among 36 stocks.


What strikes me the most is, they owned four of the same stocks:

Symbol	Company	# of Guru Owners	# of Guru Buys Last Quarter
CIT	CIT Group Inc.	2	2
HNT	Health Net Inc.	2	0
EPL	Energy Partners Ltd.	2	2
BIOF	BioFuel Energy Corp.	2	0

(Normally it is quite an effort to find the list, but with GuruFocus’s Aggregate Portfolio feature, one can easily identify the stocks owned by the chosen Gurus. The feature is for premium members only).


A brief review of these stocks:


CIT Group Inc. (CIT, Financial)


CIT Group Inc. is a bank holding company that provides financing and leasing capital for commercial companies throughout the world.


David Einhorn owned 6,320,922 shares in the quarter that ended on 12/31/2009, which is 5.94% of the $2.94 billion portfolio of Greenlight Capital Inc. Daniel Loeb bought 1,750,000 shares in the quarter that ended on 12/31/2009.


Einhorn and Loeb each commented on this stock in their respective quarterly letter:


According to Einhorn:

During the fourth quarter, our CIT investment appreciated 30% because credit markets improve and CIT successfully executed a prepackaged plan of reorganization in forty days. As part of the restructuring, bondholders were given new notes and new stock. With the conversion of $10.5 billion of debt into equity and the extension o debt maturities, CIT emerged much better capitalized. The company needs to determine if it now has a viable business model or if it needs to go into run-off.

Loeb seems to give the issue more thoughts and he sounds more positive:

CIT Group Inc. filed a “pre”arranged” Chapter 11 reorganization plan on November 1, 2009 after several months of planning and negotiations with key creditor constituents. The bankruptcy filing was necessitated by CIT’s inability to fund significant debt maturities due to the dislocation in the credit markets and the lack of government support via TLGP, which the company had hoped in vain would be forthcoming in July 2009. We had been monitoring the situation, and the Chapter 11 filing provided us with an opportunity to purchase senior unsecured debt at what we believed to be a 25%+ discount to the asset values that could be realized in an orderly wind”down.


A restructuring of a $53B non”bank financial completed within six weeks (plan confirmation was December 8, 2009) was virtually unprecedented. Through our initial sizeable November debt investment in senior unsecured bonds, we received as consideration $0.70 of a strip of 7% Second Lien Notes (2013”2017), and our pro”rata ownership of 77% of the new common equity of the company via the December emergence. We created our equity position at approximately 0.4x plan book value (~$3B), which quickly traded up to 0.7x plan book value upon listing on the NYSE.


CIT is currently one of our largest positions because we believe it presents a compelling option on the potential revitalization of one of the country’s largest middle”market lenders as it transitions (according to our thesis) to a lending institution which will be funded eventually via a retail deposit base. This path will require regulatory approvals, but the company has already reduced debt by some $10B and has extended maturities so that it has time to attempt this transition to a bank”centric model while optimizing the value of its non”bank eligible businesses (e.g. transportation finance) as the economy stabilizes and asset values recover.

Health Net, Inc. (HNT, Financial)


Health Net, Inc. is an integrated managed care organization which administers the delivery of managed health care services. Health Net Inc. has a market cap of $2.42 billion; its shares were traded at around $24.16 with a P/E ratio of 10.6 and P/S ratio of 0.2. Health Net Inc. had an annual average earning growth of 6.6% over the past 5 years.


Daniel Loeb owns 3,000,000 shares as of 12/31/2009, which accounts for 6.93% of the $960 million portfolio of Third Point, LLC. David Einhorn owns 3,502,337 shares as of 12/31/2009, which accounts for 2.78% of the $2.94 billion portfolio of Greenlight Capital Inc.


On HNT, Loeb said the following in his quarterly letter:

In the midst of the chaos during last summer’s healthcare debate, we established a position in Health Net common equity when the stock sold off following the announcement of the company’s loss of its Tricare contract with the US Department of Defense and the sale of its Northeast assets to United Health. We believed this contract loss was not a fait accompli and that the prevailing price did not reflect the residual value in the business. We also felt that the resolution of healthcare reform legislation would remove the current valuation overhang across the managed care space. Health Net’s high quality management team is focused on maximizing shareholder value, and CEO Jay Gellert is a significant shareholder in the company.


We expect Health Net will increase profitability over the next several quarters as management focuses on reducing costs. Post health care reform, the benefits of scale will become increasingly important as the industry focuses on wringing costs out of the system. The Company has significant cost reduction opportunities and is well positioned to take advantage of consolidation in the healthcare industry once the regulatory environment stabilizes.

Energy Partners Ltd. (EPL, Financial)


Energy Partners, Ltd. is an independent oil and natural gas exploration and production company based in New Orleans, LA and Houston. Energy Partners Ltd. has a market cap of $432.2 million; its shares were traded at around $10.8 . Energy Partners Ltd. had an annual average earning growth of 8.5% over the past 5 years.


Daniel Loeb bought 3,305,000 shares in the quarter that ended on 12/31/2009, which is 2.8% of the $960 million portfolio of Third Point, LLC. David Einhorn bought very position of 42,574 shares in the quarter that ended on 12/31/2009, which is 0.01% of the $2.94 billion portfolio of Greenlight Capital Inc.


BioFuel Energy Corp. (BIOF, Financial)


BIOFUEL ENERGY CORP.is a publicly traded company whose goal is to become one of the ethanol producers in the United States. Biofuel Energy Corp. has a market cap of $76.1 million; its shares were traded at around $2.94 with and P/S ratio of 0.4.


Daniel Loeb owns 5,578,800 shares as of 12/31/2009, which accounts for 1.35% of the $960 million portfolio of Third Point, LLC. David Einhorn owns 7,542,104 shares as of 12/31/2009, which accounts for 0.71% of the $2.94 billion portfolio of Greenlight Capital Inc.


Conclusion


Einhorn and Loeb are two successful hedge fund managers. In 4Q09, both men found value in the four stocks we just discussed.


GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett, David Einhorn and Daniel Loeb for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.


Also check out:

• David Einhorn Undervalued Stocks
• David Einhorn Top Growth Companies
• David Einhorn High Yield stocks, and
• Stocks that David Einhorn keeps buying
• Daniel Loeb Undervalued Stocks
• Daniel Loeb Top Growth Companies
• Daniel Loeb High Yield stocks, and
• Stocks that Daniel Loeb keeps buying