You would have been better off investing with David Einhorn than in the S&P in Q1 – but barely.
Greenlight Capital’s most recent letter to investors, reviewed and published by ValueWalk, reveals that the firm’s funds returned 1.7% net of fees during the first quarter of 2015. “The portfolio had an uneventful and profitable quarter,” Einhorn said in the letter. “Though the broad market did little, we did even less.”
So what’s the story?
Greenlight Goes Two for Three on Major Stakes
Einhorn attributes Apple’s +13% gain in the quarter to the iPhone 6 “blockbuster.” He also mentions the Apple Watch, for which he has moderate hopes:
While we have modest expectations for Apple Watch and don’t expect AAPL to maintain this level of growth, the market expects even less, as it continues to value AAPL shares at a discounted valuation. We believe that AAPL is a superior company that merits a premium multiple.
Einhorn is satisfied with SunEdison as well. One of his nicest investments, SUNE climbed +23% in Q1 and has a solid outlook. The billionaire points to the company’s February announcement that it expects to generate significant free cash flow sooner than the market anticipated.
But on another Greenlight favorite – Micron Technology (NASDAQ:MU) – the story is quite different. Its shares declined -23%, rendering it the firm’s “one significant loser during the quarter.” Einhorn’s assessment:
Weak PC sales drove a shortfall in DRAM demand leading to lower prices and reduced earnings. Our thesis is that the consolidated DRAM industry will act more rationally in the face of slower demand, moderating future cyclical declines and leading to higher profitability through the cycle. The current downturn is the first opportunity to test this thinking: either the industry will overproduce, fight for share, and kill profitability, or it will respond sensibly to slower cyclical demand and merit an upward revaluation.
Einhorn Picks Up GM, Then Backs Off
Greenlight repurchased a fresh stake at $34.62 in Q1 in anticipation of a good year for the automaker. Not only do low gas prices and raw material costs bode well for GM, but its stock buyback has been a good thing as well.
Despite a positive outlook, the firm has scaled back its exposure to GM, reducing its net exposure from 30% to 14% during the quarter. “This move was driven from both the bottom-up and the top down,” Einhorn said. Take note that David Einhorn isn’t the only billionaire who likes GM.
The Long and Short, Bottom and Top of It
Greenlight Capital has had a tough time identifying what it considers “worthy longs” and in the first quarter made only three new such investments. Short candidates, on the other hand, have been easy to find.
“Most of the investment theses we have reviewed over the past several months can at best be described as late-cycle opportunities, with valuations that often ignore economic sensitivity,” Einhorn said with respect to Greenlight’s bottom-up approach. “The operating (and in some cases activist) execution needed to achieve target results has to be rated at Triple Lindy difficulty level.”
In terms of top-down analysis, Einhorn offered up the following:
Valuations are on the high side and earnings are in a precarious spot. Last year’s snow slowed the entire economy, setting up the first quarter to be the easiest comparison quarter of the year. It nonetheless hasn’t turned out to be a good quarter (despite this year’s snow confining itself mostly to New England). At year-end, first quarter earnings were supposed to grow about 5%, but now, they are expected to decline by a similar amount, and this doesn’t even include GE’s large, anticipated first-quarter charge as it exits most of GE Capital.
On a side note, the letter also makes clear that David Einhorn really isn’t a fan of GE.
So Where’s the Money?
As of the end of first quarter, the largest disclosed positions in the Greenlight Capital funds are Apple, Consol Energy, gold, ISS A/S, Micron Technology and SunEdison. The funds have an average exposure of 102% long and 88% short, and the firm has added more shorts to reduce net exposure to the market.
Einhorn ends the letter with an E.B. White quote that indicates he things the market may get harder before it gets easier:
Did it ever occur to you that there’s no limit to how complicated things can get, on account of one thing always leading to another?