David Einhorn’s 1Q18 Leter: Down 13.6% in 1Q18

Smart Money

“Today is the oldest you’ve ever been, and the youngest you’ll ever be again” – Eleanor Roosevelt

  • Greenlight Capital returned -13.6% in the first quarter of 2018, compared to -0.8% for S&P 500
  • In our history, had five other quarters with a greater than 5% loss; in four of those, there were clear world or market events that provided a simple explanation, and in one, a few positions in our portfolio went wrong at the same time
    • This period has not been like any of these
  • Losses were broad throughout the portfolio but generally shallow (had 9 positions that each cost more than 0.5% and only one – Micron Technology – that generated a gain of over 0.5%)
  • Of our 20 largest longs, we judged 13 to have beaten expectations, 4 to have met expectations and 3 to have disappointed; of our 20 largest shorts, 9 beat expectations, 1 met and 10 missed expectations
    • The longs that met or exceeded expectations advanced around 2% and those that missed fell about 8%
    • For the shorts, those that met or exceeded expectations rose 7% and those that disappointed fell almost 5%
    • For the quarter as a whole, the longs that met or exceeded expectations wound up losing 4% and those that missed fell 17%
    • Shorts that exceeded expectations finished the quarter up 19% and stunningly, the shorts that missed expectations also finished up 5%
  • General Motors entered the year with consensus EPS estimates of $6.30, $5.80, and $5.75 for 2017, 2018 and 2019, respectively, and the stock at $40.99 had an undemanding P/E multiple of 7x
    • GM reported actual 2017 EPS of $6.62, guided 2018 to be similar, and forecast that 2019 earnings should be even better
    • The stock advanced 6% on the day of the earnings release, before rolling over and falling 18% from its peak to the end of the quarter
    • GM’s fundamentals appear favorable. Employment is strong, tax cuts are helping GM’s customers, used car values are performing well versus expectations and industry scrappage rates are increasing. GM has lean inventory and a product line-up that is gaining share with pricing power
    • Company plans to return about 10% of its market cap to shareholders in dividends and buybacks in 2018
  • AerCap Holdings and Mylan each trade at 8x earnings
    • AER has bought back 32% of its shares in the last 33 months, and MYL has bought back nearly 5% of its shares in the past few months
  • In just two quarters since it was spun off from MetLife, Brighthouse Financial has made significant progress towards achieving its objectives for capital return; it will likely reach its capitalization targets well in advance of the 2020 expectation set at the time of the spin-off
    • BHF trades at 48% of book value and under 6x earnings
  • Russell 1000 Pure Growth Index followed a 38% 2017 advance with another 7% climb through the end of March. Russell 1000 Pure Value Index has declined over 3% YTD, retracing most of its 2017 gain of 4%
  • Ended the quarter at 111% long and 82% short
  • Exited a number of positions during the quarter:
    • Exited Chemours with a large profit (exited at $31.62 vs entry price of $6.97)
    • Exited Uniper with a large profit (exited at 22.85 vs entry price of 10.02)
    • Exited Hexagon short for a small loss (covered at 414 SEK vs entry price of 339 SEK)
    • Exited United Rentals short with a medium loss (covered at $149.89 vs entry price of $76.66)

Greenlight Capital 1Q18 Letter, April 3, 2018

David Einhorn is the founder of Greenlight Capital, a long/short hedge fund with an estimated AUM of over $10 billion as of 2015.

Image Source: Bloomberg