David Einhorn’s 2018 Letter: Nothing Went Right the Entire Year

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  • 2018 loss of -34.2% vs. S&P 500 of -4.4%
  • Since inception, returned 1,367% cumulatively or 12.6% annualized
  • Given the valuations and fundamentals of our 5% or larger positions, we believe they should all do better in 2019

AerCap (AER) – Long

  • 5.8x P/E on 2018 estimates, 65% of book value
  • Leases new and mid-life airplanes to airlines globally; 99%+ utilization rate and seven-year average remaining lease term support a high degree of earnings visibility
  • Since we invested in 2014, AER has disposed of about 400 planes to improve its fleet age, technology mix and customer concentration, while generating strong gains on sale consistent with conservative carrying values
  • During this period, company has delevered, bought back 35% of its shares outstanding and grown book value per share by 15% annually
  • Global traffic growth has averaged 6.5% annually over the last five years
  • Shares of AER fell about 25% in December
  • Expect management to accelerate the sale of aircraft to redeploy into an even more aggressive share repurchase program

Assured Guaranty (AGO) – Short / Puerto Rico GO bonds – Long

  • Current valuation is irrelevant because we don’t believe the accounting
  • AGO is a financial guarantor; in addition to insuring many large long-term issuances in Chicago and NJ that may prove problematic, AGO is already responsible for billions of dollars of defaulted Puerto Rican debt
  • AGO has set aside inadequate loss reserves against what bond markets and our analysis suggest will be sizable losses
  • Believe its credit rating and ability to write new business would be at risk and it would have difficulty getting regulatory permission for the additional special dividends necessary to support AGO’s aggressive stock buyback program
  • As a hedge for the possibility that Puerto Rico’s restructuring turns out better than expected for AGO, bought defaulted GO bonds

Brighthouse Financial (BHF) – Long

  • 3.8x P/E on 2018 estimated adjusted earnings, 29% of book value
  • Never seen a life insurer trading at this kind of valuation in a stable environment unless it has either a reserving problem or a capital problem
  • Not only did BHF initiate share repurchases in mid-2018, two full years ahead of schedule, but during an early-December investor call, management revealed that business is performing much better than expected a year ago
  • Improving deposit growth, upsized cost-cutting plans and an acceleration of capital returns all combined to raise the outlook for medium and long-term earnings power and capital returns
  • Company plans to repurchase $1.5bn of stock by the end of 2021; at the YE value, this would be over 40% of the outstanding shares
  • Stock fell 48% in 2018 despite a raft of good news
  • Looking ahead to 2019 and beyond, BHF’s reported earnings should continue to benefit from deposit growth, cost cutting, and shifts in the company’s investment and hedging portfolios
  • Cash generation should benefit further from the run-off of “establishment” costs and from favorable reforms to annuity rules currently under review
  • While the business remains sensitive to market performance, including equity returns and interest rates, BHF is positioned for a very positive inflection in FCF and capital returns over 2019-2020

CONSOL Coal Resources (CCR) – Long

  • 6.9x P/E on 2018 estimates, 12.5% dividend yield
  • CCR owns an interest in the highest quality, most efficient coal mining complex in Northern Appalachia with a 26-year reserve life
  • Low cash cost and high-BTU coal coupled with its favorable logistical position allows CCR to serve domestic thermal, crossover metallurgical and international thermal coal customers in a flexible and cost competitive fashion
  • After a significant downturn, industry capacity has been rationalized and utility stockpiles are at multi-decade lows
  • Outlook for coal prices has become favorable. We believe there is upside to current estimates over the next several years

General Motors (GM) – Long

  • 5.4x P/E on 2018 estimates, 4.5% dividend yield
  • In November, company announced a massive cost-cutting program that will take $4.5bn out of annual operating expenses
  • While common narrative is that management is taking these steps ahead of a cyclical decline, the reality is that the US sedan business has been in serious decline for several years
  • Recent earnings do not represent cyclical peak conditions
  • Market does not seem to recognize the full implications of the cost cutting
  • Cost cuts are so significant that even if the various “bear cases” play out over the next several years, including risks associated with a further cyclical decline in auto sales, China, leasing, consumer credit and the high-margin light truck business, it becomes much more difficult to see GM’s earnings decline significantly as implied by the low P/E multiple

Gold – Long

  • US debt to GDP is over 100%; US Treasury announced that the US debt has increased by over $2 trillion under the current administration
  • A decade into an economic recovery, with employment approaching maximum levels, the US is running an almost $1 trillion deficit, even with low interest rate limiting the burden of existing debts
  • When the economy eventually slows, the deficit is sure to expand rapidly, possibly catastrophically
  • Politicians say deficits don’t matter; history says otherwise

Green Brick Partners (GRBK) – Long

  • GRBK is a diversified homebuilding and land development company operating in growing markets in Dallas, Atlanta, Colorado Springs, and Vero Beach
  • Tripled its revenue since going public in 2014 while maintaining industry-leading high margins and low debt-to-capital
  • Achieved this via organic growth, accretive acquisitions, launching title and mortgage subsidiaries and reducing its costs through national accounts contracts available to it as a function of GRBK’s scale
  • Expects earnings to grow moderately in 2019 despite a homebuilding industry slowdown, in which the company is well positioned to be opportunistic

Tesla (TSLA) – Short

  • 50x P/E on 2019 non-GAAP estimates which we think are optimistic
  • Bizarre situation; a lot of attention was paid to Elon Musk’s recent statement that he doesn’t respect the SEC; why should he? He committed blatant market manipulation and was rewarded with a fine, which he said was “worth it”
  • Chairman of the SEC wrote of the settlement that the “skills and support of certain individuals may be important to the success of the company”; in other words, if you are as important as Elon Musk, removal is not a serious option; he is above the law
  • TSLA had non-repeatable results in the third quarter of 2018 of selling high-end versions of the Model 3 ahead of 2019’s decrease in the Federal tax credit for buyers of TSLA’s cars
  • With that pull-forward of demand, believe the third quarter was as good as it gets and TSLA faces challenges in 2019
  • TSLA now admits that it needs to make many manufacturing engineering improvements and manufacturing design improvements in order to make a $35,000 version of the Model 3
  • With manufacturing getting to higher throughput, believe the next leg of the story will be a shortage of demand, which should undermine the bull case
  • TSLA bulls believe the company is the next Apple; ardent fan base makes that seem plausible; Apple always delighted the customers and did whatever it could to please them; TSLA, on the other hand, seems willing to offer inflated promises and poor service; Apple created loyalty by supporting its customers, while TSLA wants the customers to support it because TSLA is saving the planet
  • Recent announcement that it will be cutting workforce by an additional 7% suggests that its poor customer service is likely to get even worse; customers are already having bad experiences charging, servicing and repairing their cars, obtaining refunds from TSLA for cancelled orders and receiving vehicle registrations after taking delivery

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

Greenlight Capital 2018 Letter, January 22, 2019

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