Einhorn: “The Longs Say Stocks Can Only Go Up, Seemingly To Infinity And Beyond. We Have Seen This Before”
David Einhorn may write in his latest quarterly letter to investors that “from a portfolio perspective, this quarter was a quiet one” but based on his activity the famous poker playing hedge fund manager was quite busy.
Among his various moves, Greenlight added a new position in Perrigo in the first quarter, after several large guidance cuts, and now sees the company’s earnings forecast as achievable. He also took a new long position in Conduent, as he believes the company as burdened with “underearning” contracts that it can renegotiate and exit. He also took a new long in unidentified European financial institution. On the other side, Greenlight closed shorts in Signet Jewelers, LyondelBasell, and RPC and also closed out shorts in three Canadian banks at a loss after oil and credit loss thesis didn’t “sufficiently” materialize.
Einhorn said he still likes Apple, which is a “superior company that still trades for less than a market multiple” while trimming his short position in Rite Aid after initially expecting deal with Walgreens to close at $9-share with FTC approval, and is watching the RAD situation “carefully” as original thinking was incorrect.
Performance wise, the fund returned 1.3% in Q1, underperforming the S&P’s 6.1% rise. “Apple (AAPL), Chemours (CC) and gold were the biggest winners; the bubble basket, Rite Aid (RAD), and a short position in Tesla (TSLA) were the biggest losers.” And as he admits, “”It was a difficult quarter to be short the bubble basket, and TSLA in particular.“
One day, TSLA will fall, but not yet.
Below are some of the notable highlights from the letter, presented below.
“It was a difficult quarter to be short the bubble basket, and TSLA in particular. Perhaps as the prospects for tax reform have dimmed, the market has regained enthusiasm for profitless companies that aren’t at risk of paying taxes. A number of these stocks are back in full-blown momentum mode. Analysts continue to raise “target prices” which the market treats as news.”
“The bulls explain that traditional valuation metrics no longer apply to certain stocks. The longs are confident that everyone else who holds these stocks understands the dynamic and won’t sell either. With holders reluctant to sell, the stocks can only go up – seemingly to infinity and beyond. We have seen this before. It’s painful for the shorts, as the TSLA CEO has been happy to remind everyone via Twitter.”
“There was no catalyst that we know of that burst the dot-com bubble in March 2000, and we don’t have a particular catalyst in mind here. That said, the top will be the top, and it’s hard to predict when it will happen. Notably, a number of bubble stocks advanced despite missed expectations and/or falling estimates. The basket is sized appropriately with the understanding that twice a silly price isn’t twice as silly. In due time, we expect these bubbles to pop.”
“Our longs were profitable, though they went up a bit less than the market. Our shorts generated losses but added alpha, and gold gave us a small profit in macro. Apple (AAPL), Chemours (CC) and gold were the biggest winners; the bubble basket, Rite Aid (RAD), and a short position in Tesla (TSLA) were the biggest losers.”
“Gold rose over 8% to start the year. Nothing significant happened here (the White House columns are not gold yet); gold simply reversed a portion of the post-election decline it suffered last quarter. Gold remains a long-term position with a thesis that global fiscal and monetary policies remain very risky.”
Finally, Einhorn had some comments on the recent activist foray into GM:
While it was quiet on the portfolio front, we made more noise than usual (and more than we’d like) by making public our idea for General Motors Company (GM) to unlock tens of billions of dollars of shareholder value. As a general matter, we prefer to avoid public activism. The last time we did this was with AAPL in 2013 after owning the stock for three years. This is a similar situation; we had owned GM shares for years before advancing our idea to management.
We know this is a tough fight. Fortunately, the math is on our side (if GM does what we suggest, we believe the stock will go up a lot) and the ultimate decision will be made by our fellow shareholders. We believe others recognize that the stock is deeply undervalued and when shareholders grasp the math and the extent of GM’s behavior, they will vote with their wallets and for needed change at the Board level.
* * *
Full letter below: