Notes from the Value Investing Congress: Einhorn Edition
- Joshua M Brown
- October 2nd, 2012
Here we go!
David Einhorn (Greenlight Capital) opens with a lesson about doing your own homework, spotlights a story about how an influential investor very publicly bought a subprime lender, crowed about it to the Barron’s Roundtable as his smartest investment ever. The stock rallied for 6 weeks and then collapsed into bankruptcy.
His first stock today is Green Mountain (GMCR), a short position he’s been dead right on for awhile now.
Puts up WSJ article with the term Einhorned – “Apparently now I’m a verb.”
Revisits what happened with Herbalife call from April when he asked a few questions. “I was surprised by the reaction to my questions on the call in the share price.” Was also surprised about the analyst who downgraded based on the possibility of him talking about it. “When analysts do that they are no better than replacement refs.”
Biofuel – The media linked to our 13D but didn’t bother even reading it. The stock tripled as the media kept repeating incorrect information.
“We can’t do anything about rumors about our trading, true ones or false ones, so our policy is to respond to none of them.”
“It doesn’t make sense to follow me or anyone else into a stock, do your own work.”
Great joke: “What do you call a stock that’s down 90%? A stock that was down 80% and then got cut in half.”
OK, back to GMCR, the bashing begins. Calls the audit committee a joke. “Everything we said last time on GMCR is still true, if anything, things have played out even more like what we thought.” Green Mountain’s response to the Starbucks Verismo machine, CEO didn’t seem to even understand what the Verismo was in public comments. Notes that Green Mountain’s patent on the K-Cups is newly expired (9/16/2012) and that their deal with Starbucks on the k-cups is non-exclusive. Green Mountain’s capex – over a billion dollars in coffee roasting, means 15 cents per k-cup. Competitors can do the same for 3 cents! “This high level capex at GMCR is inexplicable.”
“We think Green Mountain is very exposed because of its high cost structure.” Green Mountain’s price cuts will have them losing money to preserve share. “This price war is just getting started. They are not the low cost competitor in a commodity business.”
Next up, a long position in General Motors (GM)
“We believe General Motors emerged as a much healthier company than most think.”
GM’s pension risk concerns are being overblown by the analysts / Wall Street.
Brand quality is improving as is pricing.
At $23, it’s a $4 billion market cap. It shouldn’t have to pay US taxes for a decades thanks to $70 billion in tax loss shields. Consensus growth forecast for sales is too low. GM is also the number one seller in China and gaining share (also number 3 in Brazil, another long-term growth market). Europe probably breaks even in three years, will remain problematic.
Average vehicle age is 11, versus 9 a few years ago. Normal population growth leads to increased demand, should mean an additional 2 million units a year. Normalized demand should mean an additional $1.10 in potential earnings.
“The product refresh cycle is critical and GM seems to be getting it right.”
GM can buy its stake back from the government of 500 million shares at $30 per share, or $15 billion. Nothing will happen til after the election with this.
GM should have $6 wholly taxed earnings by 2014 (or $8 in cash earnings), a mid-cycle result and should merit a decent multiple.
His next long idea is Cigna Health (CI).
An HMO and a very boring idea but one where doing the homework is worth the effort.
Obamacare’s impact is estimable and can be analyzed, but uncertainty has meant a big discount in the stock. Healthcare is a growing part of the economy, starting an HMO is difficult and the main players in this space already have massive scale. Long-term results show HMOs earn steady returns.
Things that won’t impact HMOS: Greece, erectile dysfunction etc. Big laugh line.
“Even when HMOs make less than expected, they still make a lot. Cigna is our favorite HMO, it’s more like three businesses in one.” Einhorn likes the low-risk, steady ASO part of the business.
Demographics favor the recent Healthspring medicare business, which should grow at a mid-teens rate.
Cap risks from regulation and exchange risks with small biz (where CI doesn’t play yet) are small and are already discounted.
The Pharmacy Benefit Manager (PBM) business could be spun off someday and the proceeds could buy back CI stock. There’s also a group disability and life insurance sub with a lot of promise.
Cigna’s international business is already growing 20% and it is just now entering fast-growth nations like Turkey and India.
Cigna as a whole is high quality and faster growing than it’s peers yet trades at a discount.
His last stock idea is a short of Chipotle (CMG), which he thinks is a good company but dangerous to own given the competitive environment and valuation.
Chipotle: We think it’s a short. Highly competitive industry, big expense headwind coming in the form of healthcare for employees – “2014 isn’t that far away.”
“Resurgent Taco Bell is the biggest competitive threat.” The sell-side doesn’t get that Panera and Qdoba are not the real competitors. “Taco Bell has started to eat Chipotle’s lunch.”
Chipotle has started to push the limits to its pricing power to the limit by passing costs on. Taco Bell has launched Cantina Bell to compete with Chipotle in its 5600 stores, this is major. Chipotle’s customers have been surveyed, the number that prefers Cantina Bell is large. If Taco Bell can siphon off even 5 to 10% of Chipotle’s business, this is a big deal.
Bottom line is that based on Greenlight’s own survey, the typical Chipotle customer is more likely to switch to Cantina Bell than most assume.
Einhorn reminds us that Chipotle’s stock price has a history of not reacting well to any bad news. He concludes with a slide showing massive insider sales of executives, but doesn’t say a word about it. So badass.
This concludes my coverage of 2012 Value Investing Congress.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.