Billionaire hedge fund manager David Einhorn thinks that tech stocks are in a bubble. But he is bullish on other stocks. One of these stocks, Micron Technology (NASDAQ: MU), has already made money for investors in his fund, Greenlight Capital.
In his most recent letter to investors, sent only to his fund’s backers but widely leaked, Einhorn disclosed that his fund had a “large” position in SunEdison (NYSE: SUNE) and a “medium-sized” position in Conn’s (NASDAQ: CONN).
Since Einhorn has a history of being right, both stocks shot higher on the news. Let’s take a closer look at what it is that makes David Einhorn bullish on these two stocks.
SunEdison develops solar power plants for utility companies. It previously had two other business lines. The first, a solar module assembly business, has already been sold. The second, a semi-conductor wafer business, is expected to be spun-off in an IPO later this year.
SunEdison jumped almost 12% the day Einhorn’s position was made public. Take a look at the chart below to see how dramatic the move higher was.
Though shares moved dramatically that day they haven’t moved much since. The chart below shows the stock’s performance since then, a series of minor movements up and down resulting in an overall decline of 0.1%. The blue line indicates the closing price on April 22, the day Einhorn’s position was disclosed.
Why does David Einhorn like SunEdison enough to make a “large” investment?
Einhorn appears to like the prospects for the solar industry based on this statement from his letter.
“The declining cost of solar energy combined with the rising cost of conventionally produced electricity should position SUNE as a winner.”
Specific to the company itself, Einhorn is pleased that SunEdison has a large base of credit-worthy utility customers and even more pleased that the company is exiting the other two businesses that I discussed above. Since these two businesses had been a drag on the balance sheet, he now views the stock as a pure play on the company’s strong solar power development business.
Einhorn indicated that Greenlight Capital’s average price-per-share is $15.55 and that he believes the value of the company is around $35 per share. Compared to the current price-per-share of $20, the stock has potential upside of 75%.
Like SunEdison, shares of Conn’s moved sharply on the news that Einhorn’s Greenlight Capital had invested in the company. Though the initial spike in shares didn’t last through the end of the trading session, the stock still closed 7.65% higher for the day.
Unlike SunEdison, shares of Conn’s have not held the price at which they closed on April 22, indicated by the blue line. The stock has fallen 7.3% since then.
Conn’s is a specialty electronics retailer with a foothold in Texas and the southwest but is expanding with new stores, such as one in Memphis, Tennessee set to open this week.
Unlike competitors Best Buy (NYSE: BBY) and RadioShack (NYSE: RSH), Conn’s business metrics appear to be very strong. Einhorn specifically cites the 33% growth in quarterly same-store sales announced in February.
Conn’s is a bit different than its competition because it finances 77% of customer purchases with its own subprime credit portfolio. However in the same earnings report in which Conn’s reported strong same-store sales, the company also announced increased credit losses from its subprime portfolio.
“Given the market’s past experience with deterioration in subprime credit, the stock reaction was severe: The price fell from $79 to $32 on the news. We believe that … the market overreacted to moderately bad news.”
Einhorn didn’t give a price target but announced that Greenlight Capital had acquired its shares for $35.49. The stock currently trades at just under $43.5, a premium of 22% over what David Einhorn paid.
But if you believe that the stock will return to $79, shares still have 82% upside potential at these levels.
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