Einhorn Loads Up on Apple Calls

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If there's one thing investors can't call David Einhorn, it's a liar.

Greenlight Capital, the hedge fund company that billionaire David Einhorn manages, recently disclosed that it increased its holdings by 20% in Apple (NASDAQ: AAPL  ) as of the end of last year. At current levels, Greenlight owns approximately $600 million of Apple, making it the firm's largest holding. Perhaps even more noteworthy is that Einhorn picked up $146 million in Apple call options during the fourth quarter of 2012. Not only does this combined $746 million position in Apple represent extreme optimism, but more than 11% of the fund's total value is now long Apple. With such a concentrated position, Apple will surely make or break Einhorn's year.

Strong conviction
Mind you, Einhorn loaded up on Apple before he made quite a splash with his convoluted preferred-share issuance proposal. In a nutshell, Einhorn is proposing for Apple to issue 4% yielding perpetual preferred shares in increments of $50 billion offer, which he believes that every $50 billion in returned capital should "unlock" about $32 per share on the common stock. Over the long term, Einhorn thinks Apple will be able to return "several hundred billion dollars," which in theory should add a few hundred dollars in share price, assuming the logic pans out.

With Apple options now in play, Einhorn has taken the stance that Apple will ultimately return more capital to shareholders, and that should act as a short-term catalyst for Apple's share price. Under this scenario, call options will give Einhorn the opportunity to make quick profits and help mitigate the losses associated with the 30%-plus decline in Apple's shares since September.

Apple's stance
Aside from "thoroughly considering" the proposal, Apple has yet to reach a formal decision on what to do about its $137 billion in cash. During the Goldman Sachs Technology and Internet Conference, CEO Tim Cook told investors that Apple doesn't have a "Depression-era mentality." Because the company makes such risky bets on its small product lines, it takes a conservative stance when it comes to managing finances.

No matter the outcome, I think it's safe to say that Greenlight is in a hurry to make up for Apple's underperformance. Although I believe in the long-term prospects of Apple, I don't believe in inviting more risk to your investment portfolio in exchange for some short-term gains. Being an Apple investor today takes patience in a market that fails to acknowledge that the company isn't on life support.

There is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple and what opportunities are left for the company (and, more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

Read/Post Comments (7) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 18, 2013, at 6:29 PM, SimchaStein wrote:

    "thoroughly considering" and "silly side-show". Both quotes from Tim Cook. Why would Apple, who has no need for cash, take on a long-term obligation? It's like a massive perpetuity bond. The smart move is to increase buy-backs and dividends, which translates to better yield and EPS.

  • Report this Comment On February 18, 2013, at 6:32 PM, dwilh51183 wrote:


  • Report this Comment On February 18, 2013, at 6:44 PM, sammycooool wrote:

    How stupid is Einhorn?? He bought out of the money calls to the tune of $ 146 million bucks What an idiot, he will lose it all.

  • Report this Comment On February 18, 2013, at 10:11 PM, iphonerulez wrote:

    Apple is nothing but a value trap. Even lowly Hewlett-Packard is outperforming Apple over the last three months. Apple isn't going to return anything to shareholders. By the end of this quarter, Apple should be down to around $400 a share. It's one hell of a lousy investment for anyone, even hedge funds. Those guys can turn air into riches, but Apple doesn't even have any air. Apple is just a black hole investment. It sucks everything in, but lets nothing back out.

    In the end, Apple is going to let itself be destroyed by companies one-tenth its size instead of destroying all those smaller companies. It's disgusting for an Apple shareholder to see a 800 lb. gorilla get toppled over by a few pygmy marmosets.

  • Report this Comment On February 18, 2013, at 10:13 PM, bbrriilliiaanntt wrote:

    What calls did Einhorn buy? What Expiration? What Strike? Thanks...

  • Report this Comment On February 18, 2013, at 10:37 PM, savron999 wrote:

    400 a share? less than 3x cash? No other component of Appl is woiryth anything? interesting investing philosophy...

  • Report this Comment On February 19, 2013, at 10:57 AM, StopPrintinMoney wrote:

    iBubble had popped. Now the Wall street is trying to revive it.

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