Noted short-seller David Einhorn rose to prominence betting against Allied Capital, a private equity firm that offered debt and equity capital to finance leveraged buyouts, acquisitions, and corporate restructurings. Einhorn questioned the accounting practices of the firm and alleged it was operating as a Ponzi scheme.
He was ultimately proved right when the Securities & Exchange Commission said Allied had violated securities laws surrounding its accounting and the investment valuation of illiquid securities it held.
Einhorn also notably shorted Lehmann Brothers before its collapsed, helping to ignite the financial markets crisis in 2008.
Although famous for his very public short sales, Einhorn is very much a long investor, too. His DME Capital hedge fund, the successor to his previous investment vehicle Greenlight Capital, owns shares in 39 different companies. In the the second quarter, he was buying and selling shares in a number of stocks, but took new positions in just two stocks in the period: Peloton Interactive (NASDAQ:PTON) and Capri Holdings (NYSE:CPRI).
These were two very beaten down stocks that had fallen far out of favor with the market. Connected fitness stock Peloton is down 97% from its 2021 high while Capri, the owner of luxury goods Michael Kors, has lost more than half of its value over the past 10 years.
Both, however, are performing well since Einhorn bought their stocks. PTON is up 23% while CPRI is 10% higher. With some momentum behind them once more, let’s see if either is a fit for your portfolio.
24/7 Wall St. Insights:
- David Einhorn made a number of high-profile, famous short sales of stock that ultimately proved right, catapulting him and his Greenlight Capital hedge fund to the forefront.
- Yet the billionaire investor also goes long on stocks, and in Q2 he established two new positions in stocks that were beaten down severely by the market.
- If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.
The case for Peloton Interactive
A pandemic darling, Peloton Interactive was the right stock at the right time. Faced with lockdowns during Covid and forbidden to go to gyms and fitness centers, or in some cases even the beach, people bought Peloton’s connected fitness equipment in droves. PTON stock soared, hitting $167 a share.
However, once out of home entertainment returned and people could workout at a gym once more, sales fell and Peloton stock cratered. It didn’t help that Peloton’s equipment was crazily priced at thousands of dollars each.
Today, shares go for $4.74, which is 75% above their low point. Einhorn bought in the second quarter at an average price of $3.84 per share. He purchased 6.8 million shares that are now valued at almost $23 million. What did he see in the connected fitness guru?
Although still nominally an equipment company, Peloton is focusing on its software business rather than the hardware. Because software carries high profit margins, it has been narrowing its losses. Although the number of members continues to fall, revenue remained flat in the fiscal fourth quarter, meaning Peloton is squeezing more money out of its core customers.
The fitness stock was also able to refinance its debt, giving it breathing room, and there have been talks of a buyout. But this is not a growth business. Peloton is still saddled with a lot of debt, its CEO stepped down, and the connected fitness market is more niche than trend. This could be just a short-term play by Einhorn and I wouldn’t be a buyer of PTON stock.
The case for Capri Holdings
Arguably the biggest thing going for Capril Holdings is the possible acquisition of the company by rival Tapestry (NYSE:TPR), the owner of Coach and Kate Spade. But the Federal Trade Commission is blocking the $8.5 billion merger announced a year ago on the grounds it would eliminate competition in the “accessible luxury” market.
Einhorn may have bought his 685,000 shares of Capri on the belief the deal would eventually go through. The government’s case seems to stand on pretty shaky reasoning, as the handbag market is quite competitive. Still, with Tapestry having offered to buy Capri for $57 a share and CPRI stock trading around $43 a share, the market is still holding its breadth.
Yet the FTC has a horrible record when challenging mergers in court over the past four years. Last December, Yale University pointed out the regulatory agency had not won a single case that had gone to trial.
By itself, Capri Holdings is not that interesting. Sales continue to fall and it produced significant losses in its fiscal fourth quarter. As an arbitrage play on the merger going through, which is what Einhorn may be doing, it seems a bet one worth taking. Einhorn’s CPRI stock is worth $22.6 million, up 10% from his $39 buy-in price, one that could soar another 33% if the deal is approved.
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