Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



3 Stocks David Einhorn Could Be Shorting

Hedge fund manager David Einhorn believes we're living through a second tech bubble. In a letter to his investors leaked to the press last week, Einhorn stated that a "clear consensus" had emerged: The present valuations of many tech stocks are unsustainable.

Einhorn said that his fund was shorting a basket of stocks containing several highfliers, but, unfortunately, he didn't name any particular companies. Still, based on hints contained in the letter, (NYSE: CRM  ) , (NASDAQ: AMZN  ) , and Castlight Health (NYSE: CSLT  ) stand out as potential targets.

Salesforce is known for its stock-based compensation
Salesforce's critics have often attacked the company's aggressive accounting practices. Under generally accepted accounting principles, Salesforce has been bleeding money for the last three years.

Salesforce's adjusted earnings per share (the figure management would prefer investors look at) tells a drastically different tale. On a GAAP basis, Salesforce lost $0.39 per share last fiscal year -- on an adjusted basis, it profited $0.35. That stark difference comes from Salesforce's use of stock-based compensation. Under GAAP rules, it's an expense; Salesforce's management, however, believes it should be excluded.

Einhorn didn't mention Salesforce, but easily could've been referring to the company when he slammed the practice of excluding stock-based compensation:

Certain "cool kid" companies and the cheerleading analysts are pretending that compensation paid in equity isn't an expense because it is "non-cash." Would these companies be able to retain their highly talented workforces if they stopped doling out large amounts of equity?... if you are an equity holder trying to value the businesses as a multiple of profits, how can you ignore the real cost of future dilution that comes from paying the employees in stock?

Einhorn has been critical of Amazon's management
Despite its domination of online retail, Amazon has never been a particularly profitable company -- and management has made no attempts to hide that fact. Even with the recent sell-off, Amazon shares are still trading with a price-to-earnings ratio of more than 400, which might fit in line with Einhorn's general sentiment of overvalued firms.

Einhorn did mention Amazon in the letter, noting that shares fell more than 90% following the collapse of the last tech bubble, but he didn't outright admit to betting against the retailer. Still, Einhorn has been a harsh critic of Amazon, and if he's shorting highfliers, Amazon would be a natural fit.

In 2012, at the Ira Sohn investment conference, Einhorn criticized Amazon and its management team, finding fault with its cloak of secrecy. Comparing Amazon CEO Jeff Bezos to Batman, Einhorn noted the company's inability to grow its operating profit, and said that the retailer's long-term future was a "riddle."

Castlight Health pops in its debut
As to why he believes we're currently living through a second tech bubble, Einhorn cited, among other things, a recent market trend: "[The] huge first day IPO pops for companies that have done little more than use the right buzzwords and attract the right venture capital," Einhorn wrote.

Castlight Health fits that description perfectly. In its public debut last month, shares more than doubled, surging more than 130%. Castlight shares have given back their first-day gains in recent weeks, but the company still carries a high valuation.

At present, its business is valued at over $2.5 billion, despite generating just $13 million in revenue last year. Castlight isn't profitable, nor does it expect to be anytime in the near future. It is, however, lavish in its use of buzzwords -- "cloud" was used no less than 113 times in its S-1 prospectus, while "cloud-based" was used 71 times.

Einhorn admits shorting is a dangerous game
Should investors short these stocks? Probably not. Even assuming these are among the stocks Einhorn has bet against, he acknowledges that shorting such high-flying momentum stocks can bring a great deal of pain: "Twice a silly price is not twice as silly; it's just silly," he quipped.

But, in light of Einhorn's impressive short-selling track record, his calls of a second bubble shouldn't go completely ignored. Investors whose portfolios are dominated by such firms may wish to reevaluate their holdings.

The one tech stock Einhorn loves
Einhorn may be skeptical of overvalued tech firms, but there's one company he's long supported: Apple. And if you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Read/Post Comments (0) | Recommend This Article (0)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2936356, ~/Articles/ArticleHandler.aspx, 9/4/2015 4:18:50 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Sam Mattera

Sam has a love of all things finance. He writes about tech stocks and consumer goods.

Today's Market

updated 7 hours ago Sponsored by:
DOW 16,374.76 23.38 0.14%
S&P 500 1,951.13 2.27 0.12%
NASD 4,733.50 -16.48 -0.35%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 3:59 PM
AMZN $504.72 Down -5.83 -1.14% CAPS Rating: ***
CRM $68.25 Up +0.27 +0.40% CAPS Rating: **
CSLT $5.04 Up +0.05 +1.00%