2 Recent Long Ideas From David Einhorn

27 Oct

David Einhorn’s shorts get extensive media coverage and attention from the investor community. He is so popular among short sellers that even a small question from him on Herbalife’s earnings call lead to the stock plummeting 10%. And when he didn’t mention Herbalife in his latest presentation at the Value Investing Conference, the stock gained. This reputation is well deserved after his stupendous success with GMCR’s short. His latest bearish bet Chipotle is getting an equal amount of attention.

In addition to his short ideas, David Einhorn suggested two equally good ideas in the latest Value Investing Conference. In this article, I will be focusing on these long ideas from David Einhorn which are available at significantly low valuations and have good growth prospects going forward.

Cigna (NYSE: CI)

Cigna is a global healthcare company with an insurance subsidiary. The company is trading at a forward PE of 7.97x. According to analyst estimates the company’s top line is expected to grow 19.60% in the current year and 10.60% next year. It is expected to post EPS of $5.53 in the current year and $6.13 next year.

Cigna’s shares have seen a good 20% run up since July. I still see further upside in Cigna’s share prices. Cigna is expected to post the fastest EPS growth among its peers and has lower exposure towards the reform implementation issues. In addition I see two specific catalysts for the stock in the form of PBM optionality and VADBe divesture.

  • PBM optionality: After Cigna’s acquisition of Health Spring, it has become likely that Cigna will outsource its PBM business to Citrix which is the current PBM partner of Health Spring.  In the past, similar PBM deals have proved to be EPS accretive for the companies like WellPoint and Aetna.
  • VADBe Divesture: Any step towards addressing VADBe exposure is another catalyst for the stock. I see a possibility of divesture or reinsurance in this case.

Further, as per Yahoo! Finance data, the company has seen a 10% reduction in its short interest from August to September. It appears like short sellers are covering up their positions before above mentioned near to medium term catalysts take hold. Thus, I recommend buying the stock.

General Motors (NYSE: GM)

General Motors was another good long idea from David Einhorn. The company is available at a forward PE of just 6.31x. According to analyst estimates, the company is expected to grow its EPS 25% from $3.14 in the current year to $3.93 in the next.

GM is primarily a 2013-14 product cycle story with K2XX launch being especially important. In addition, GM is steadily reporting progress at Opel restructuring which is likely to serve as another catalyst. Underfunded pension liabilities which have been a long term headwind for GM also seem to be fading with improving stock markets and GM’s recent pension derisking deals making it a good medium to long term buy.

I also like General Motors’ immediate peer Ford (NYSE: F). In fact, I believe that Ford might be a slightly better investment than General Motors from the near term perspective given it’s under stocked inventories. Also Ford can see some positive earnings momentum from the launch of its new Escape CUV. Ford is trading at a forward PE of 6.79x mainly on the back of same concerns as General Motors. As the sentiments towards industry improve and some headwinds fade, I believe both stocks can see a good upside.

To sum up, both Cigna and General Motors are available at very cheap valuations and have near term company specific catalysts making them good long candidates. Cigna’s PBM outsourcing and divesture of VADBe liabilities are two catalysts to watch in the near term while GM’s new product cycle will be an important driver for the stock. Although David Einhorn hasn’t mentioned his take on Ford, I would recommend investors to consider that as well from the near term perspective.

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