A smart way to follow value investor David Einhorn into his latest play that generates income to boot

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A smart way to follow value investor David Einhorn into his latest play that generates income to boot

Value investing is an investment strategy that involves buying stocks that appear to be undervalued by the market. The goal is to find companies trading below their intrinsic or book value, often using financial metrics like the price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, or cash flow analysis. Value investors believe these companies are undervalued due to temporary issues, market overreactions, or broader economic conditions. Still, they expect the stock’s price to reflect the company’s true worth eventually. The approach is long-term, as value investors wait for the market to recognize the company’s actual value, which may take time. This method was popularized by investors like Benjamin Graham and Warren Buffett, who advocate for buying strong, financially sound companies at a “discount.” By focusing on fundamentals rather than short-term market fluctuations, value investing emphasizes patience, discipline, and a deep understanding of a company’s financial health and market position. On a podcast earlier this year, well-known hedge fund manager David Einhorn of Greenlight Capital lamented that modern-day passive investors pay no attention to “value” of the companies they buy. On Wednesday at CNBC’s “Delivering Alpha” event , one of the opportunities he identified was the seemingly moribund agricultural equipment manufacturer CNH Industrial, whose share price has remained essentially unchanged over the past ten years. CNH is indeed trading at a seemingly cheap multiple. At just 9 times forward earnings, CNH is trading at a considerable discount to competitors such as Deere & Co (17.5x forward) and Agco Corp (13.2x), which in turn are considerably “cheaper” than either the industrial select sector index (27x) or the S & P 500 (25.3x). Investors who haven’t paid attention to value before now might see this as a juicy opportunity. The problem is that CNH is a “cyclical stock.” Cyclical companies operate in industries sensitive to economic cycles (e.g., automotive, construction, and commodities). They often trade at a discount because their earnings and revenues depend highly on the broader economic climate. These companies typically see reduced product demand during economic downturns, leading to lower profitability. Investors discount these companies because of the risk and uncertainty in their earnings potential. Agricultural equipment companies’ fortunes tend to follow agricultural commodity prices. Farmers buy new combines when crop prices are high and invest less when they fall. CNH ALL mountain CNH Industrial, long-term Einhorn’s point is that even though many crops, such as corn, wheat, and soybeans, have fallen precipitously from their highs a couple of years ago, equipment does eventually wear out and require replacement regardless, and the cycle may be nearing a bottom. Perhaps, but there’s another reason CNH might appeal to investors: yield. The company’s current dividend yield is about 4.6%, but it only pays it once per year. CNH will go ex-dividend on May 12th, 2025. The trade So what can a yield-seeking investor do in the meantime? A cash-covered put strategy is an options trading approach where an investor sells options on a stock they are willing to buy at a specified price while setting aside enough cash to cover the purchase if the option is exercised. Here’s how it works: Sell a put option : The investor sells a put option for a stock, agreeing to buy the stock at the option’s strike price if the option is exercised. In return, they receive a premium (the price of the option) from the buyer. Set aside cash : The seller must keep enough cash in their account to buy the shares if the option is exercised. This cash “covers” the obligation to purchase the stock. Outcome Scenarios : If the stock price stays above the strike price, the option expires worthless, allowing the investor to keep the premium as profit. If the stock price falls below the strike price, the option buyer will likely exercise it, obligating the seller to buy the stock at the strike price. A cash-covered put is a relatively ************* strategy, often used by investors willing to own the stock at a lower price and want to generate income through the premium. As of Wednesday’s close, an investor could sell the December $10 strike puts for 25 cents. While that may not seem like a lot of premium, that 2.5% of the current stock price for selling an essentially “at the money” put that expires in just over a month, or more than 20% annualized. If the share price is higher today, the bid for those puts is likely to fall, but provided the effective annualized yield is greater than 15% or so, repeatedly selling puts can represent an attractive way to generate yield on stocks like this that one would like to purchase at a slightly lower price. DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.

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