David Einhorn, the Greenlight Capital hedge fund manager who had many high-profile trading wins on the short side in 2011, has established long positions in Dell Inc. and Xerox Corp. (NYSE: XRX) to start off the new year, according to his most recent partner letter.
The letter, dated yesterday, made its way over the Internet today. Dell rose about 4%, and Xerox rose 2%.
"While the computer business is mature, Dell has broadened its offerings over the last few years, so that about half its sales and more than half of its gross profits come from other products," Einhorn wrote in the letter. Dell's P/E multiple is only four times earnings, net of cash. "This reflects a valuation usually associated with collapsing businesses."
In addition to being cheap, Dell has gotten smarter about buying back stock at better prices, according to Einhorn.
As for Xerox, he believes its 2010 acquisition of the business processing outsourcer Affiliated Computer Services will help it drive growth by selling value-added services.
However, Einhorn pointed out that Greenlight has been in and out of the shares before. "The first time, we bought with the stock price around $9.35, and sold with a modest gain over concerns about XRX's Japanese exposure after the earthquake. That issue appeared fully discounted by the market during the fourth quarter when we re-established a position at $7.61."
You've got to admire the guy's precision on prices. Obviously, Greenlight is buying thousands and thousands of shares, but he has been careful to go to two decimal places. Clearly, the pennies matter at Greenlight.
Einhorn often garners lots of press when he puts his ideas in the spotlight. In his letter, he recounted some of the big stories in which he was involved in 2011. His critical presentation at the Value Investing Congress caused shares of Green Mountain Coffee Roasters (Nasdaq: GMCR) to tumble. They tumbled further after the company missed earnings expectations, and many questions arose regarding the accounting issues Einhorn pointed out in his presentation. Greenlight ended up making a lot of money by shorting Green Mountain shares.
It also made bundles of cash by shorting First Solar Inc. (Nasdaq: FSLR) in 2011. "Our largest winner by far was our short" of that stock, "which fell from $130.14 to $33.76 per share and was the worst performing stock in the S&P 500."
Einhorn had a modest year with his funds, which climbed about three percentage points overall as the S&P 500 finished flat for the year. These gains, though modest, look good when you consider that many high-profile hedge fund managers, including the billionaire John Paulson, lost more than 30% in some funds. Greenlight, which manages more than $10 billion, still has a stellar track record. Since the mid-1990s, its annualized gains have averaged more than 20%.
Einhorn also makes an interesting point about the European financial crisis -- how it appears to ebb and flow in the news media and public consciousness like some B horror flick:
The cycle looks like this: Time passes and the crisis deepens. Markets, eternal creatures of habit, begin to reflect the ensuing fear. Then, just as things appear ready to unravel, there is a reprieve, as red headlines race across the screen: "Sarkozy and Merkel to Meet at Deauville," "Obama Phones Cameron," or "Christine Lagarde Waves From Bus." The market jumps. You'd think the media would quit falling for this charade, but having run out of clever headlines to describe the impending doom... they herald every briefing, meeting, assembly, and conference call.
Einhorn describes this process as "Lather, Rinse, Repeat," and he does not seem to believe the situation is getting any better. "2012 may be the year in which the currency crisis will no longer be kept at bay by politicians buying time with empty promises."
Cheery, eh? His solution: Focus on good companies with really cheap valuations.
Like Dell and Xerox.