Activist David Einhorn is taking a bite out of Apple

As we know, the big news this morning is that legendary hedge fund manager, David Einhorn of Greenlight Capital is suing Apple to modify a proposal in its proxy, which Einhorn believes does not conform to regulatory rules.

Greenlight said it is opposed to the proposal, which the firm said would remove Apple’s ability to issue preferred stock from its charter.

Furthermore, Einhorn says that Apple is “utterly misvalued at current levels” and that the company should be allocating its $145 Billion in cash to its shareholders, preferably through a preferred stock that would pay out a 4% dividend.

Now, at are always interested when a legendary billionaire hedge fund manager, who at times can play the role of an activist, comes out publicly to take on a company’s management.  In this case, the investor is actually suing the company.

Is the bottom in for Apple?

Our research shows, through extensive studies and backtesting on perhaps the deepest database of activist investor data, when a high profile billionaire investor, like a David Einhorn, makes a public statement or strategic move against a company, a bottom is usually carved out in the stock.

The reason this action works:  The sentiment on the stock tends to change from negative to positive, as everyone reads the news and believes that the company in the crosshairs will eventually comply with one of its largest shareholders.

Not so fast

But we don’t think this is the case with Apple and David Einhorn.  First, Einhorn cut his stake in Apple significantly last quarter.  That’s not a very strong sign of his confidence in the stock. Second, Einhorn initially started buying Apple in the high 200’s, according to SEC filings.  Conversely, we find this “bottoming” effect to be most frequent when a large stakeholders is rattling cages, when he is down on a stock.

Bottom line:  We don’t feel his lawsuit will push the stock higher in the long term. Yes, the stock will probably get a short term lift from the news today. But the biggest winners come when you find stocks where a large billionaire stakeholder is bullying company management when they are down significantly (20% or more) on the stock — and he/she has not reduced his position.

That’s not the case here with David Einhorn.  He is not down on his position and has even reduced his stake in Apple. So Caveat Emptor (Buyer Beware) on this news today.