Why Einhorn Is Wrong About Apple

Earlier today, Benzinga covered David Einhorn's Greenlight Capital quarterly investor letter. In the letter, Greenlight defends Apple AAPL against a variety of bearish theses.

Specifically, Greenlight highlights four common rebuttals that analysts and commentators have put out on the Apple bull case, those being: 1) too many hedge funds own AAPL, 2) no company can be a $1 trillion company, 3) mobile leaders have crashed before and Apple should be no different, and 4) Apple can't possibly maintain its growth.

It is his first point to which I disagree; not that his data is wrong in that only 5% of Apple stock is owned by hedge funds and that no hedge funds rank in the top 40 holders, but that Apple is not over-owned.

According to research by Kai Petainen of the University of Michigan's Ross School of Business, Einhorn has overlooked a large asset base in his theory that the Apple market is not yet saturated. Apple is owned by 4,675 mutual funds, which is second only to Microsoft MSFT in fund ownership. Also, it represents about 4.04% of all of these portfolios, meaning that only so many more funds can add to it, as positions over 5% are either unwanted or potentially banned based on investing rules for mutual funds.

Lastly, more funds have been decreasing their positions, rather than increasing positions. So the question I have for Einhorn is this: if hedge funds are notorious for finding bargains before retail investors, and retail investors are largely saturated in Apple, are hedge funds under-invested in Apple or are they already sold out and waiting for retail to follow?

Also, why only focus on some big name, high profile stocks? In terms of Apple, Einhorn's position did not change during the quarter, and yet Greenlight bought Oaktree Capital OAK, Computer Sciences Corp CSC, and Expedia EXPE. Also, Greenlight owns 25.6% of the outstanding A-stock in Biofuel Energy BIOF and 84% of the B-shares.

Einhorn, why focus on defending Apple and not mention all of these other positions? Has the data I have presented caused any second thinking on your defense of the first Apple bear case? I am just looking for answers and I would love to hear from you.

Kai Petainen‘s views on the market and stocks are his alone, and do not reflect the views of the Ross School of Business or the University of Michigan. Kai teaches a class on quant screening, F334 — Applied Quant/Value Portfolio Management, at the Ross School of Business. Kai is a MFolio master at Marketocracy, and is featured in Matthew Schifrin's book, “The Warren Buffetts Next Door“. You can follow Kai on Forbes.