Thursday, May 31, 2012

Greenlight Capital's Q1 Letter: David Einhorn Defends Apple, Still Short St. Joe

David Einhorn's hedge fund Greenlight Capital is out with its first quarter letter to investors.  In it, the hedge fund details why they're long Apple (AAPL), why they're still short St. Joe (JOE), as well as updates on Seagate Technology (STX) and the Japanese Yen.

Net Exposure & Top Positions

Greenlight's average net exposure during the quarter was 36% net long (95% long & 62% short).  Their top five largest disclosed long positions were (in alphabetical order): Apple, Arkema, General Motors, gold, and Seagate Technology.  The hedge fund opened up to new money for the first time since 2008 which is also worth pointing out.

Refuting Apple Concerns

Greenlight presents the 'bear case' concerns often highlighted by investors and then refutes them.  They write,

"1. Too many hedge funds own AAPL.  It's not clear what the objection is here.  We suppose the worry is that there is a herd mentality among hedge funds, and that when one fund sells, there could be a cascade of hedge funds selling shares and the stock price will collapse.  Moreover, if everyone already owns AAPL, who is left to buy it?  Collectively, hedge funds currently hold less than 5% of AAPL's outstanding shares, and no hedge fund ranks among the top 40 holders of the stock.  The average hedge fund has less than 2% of its equity assets in AAPL versus AAPL's 4% weighting in the S&P500, which means hedge funds are actually underweight AAPL."

Einhorn's fund also points out that while many detractors view Apple as a hardware company potentially subject to decline, Apple is actually a software company that has repeated sales of high margin hardware. 

This is a perfect characterization that many seem to miss.  After all, many users bought Mac computers to get away from various viruses and "blue screens of death" often associated with Microsoft Windows.  In order to get the software, though, consumers have to buy the expensive hardware.

For more from this hedgie, head to David Einhorn's presentation at Ira Sohn as well as his slideshow on preferreds.

Embedded below is David Einhorn & Greenlight Capital's Q1 letter to investors:

Einhorn will be presenting his latest stock pick at the Value Investing Congress in NYC in October.  Market Folly readers can receive a discount to the event by clicking here and using code: N12MF3

Third Point Reduces Technicolor Stake

Dan Loeb's hedge fund Third Point late last month filed on the Paris Bourse regarding their stake in Technicolor (EPA:TCH).  Due to a disclosure on April 20th, Third Point have decreased their ownership stake in the company.

Third Point went from owning 7.66% of Technicolor's shares to 4.87% of shares.  This filing was made as they've now gone below the 5% ownership threshold that requires them to file.  We originally detailed when Third Point crossed the 5% threshold early this year to begin with.

About two weeks after Third Point's latest disclosure, Technicolor announced its plans to launch a rights offering to raise up to €158 million in order to fortify its balance sheet and implement its "Amplify 2015" strategic roadmap.

Third Point's founder Dan Loeb is profiled and interviewed in the new insightful book, The Alpha Masters.

Per Google Finance, Technicolor is "a France based company engaged in the development of broadcasting technologies. It supplies production, postproduction and distribution services for content creators, broadcasters and network operators. Technicolor’s activity covers services for Content Creators; digital home products and software service platforms, and research and licensing."

For more from this hedge fund, you can read Third Point's Q1 letter here.

What We're Reading ~ 5/31/2012

The holdings hedge funds don't want you to know about [Abnormal Returns]

On hedge funds and hiring [FINalternatives]

Josh Fink's wild hedge fund ride [AR+Alpha]

How Boaz Weinstein outsmarted JPMorgan [NYTimes]

Everyone's jumping into junk bonds [Reformed Broker]

Elliott Management's argument for sale of BMC Software [Dealbook]

Mary Meeker's latest presentation on internet trends [Business Insider]

Timing isn't everything for value investors [WSJ]

How Tim Cook is changing Apple [Fortune]

Why airlines are undervalued [Barrons]

Can Dell turn it around? [Techinsidr]

Analysis: deconstructing Sony [Brooklyn Investor]

For Paul Singer, success lies in humility [Dealbook]