David Einhorn’s Stopped Shorts
While GuruFocus does not catalogue the short positions of most gurus because they are not required to disclose them, it can be informative to look at the ones they report occasionally in their quarterly letters.
Though one of Einhorn’s first quarter short positions ranked as his third most profitable, collectively they were less successful than those of yester-quarters. While his long portfolio almost matched the market’s 10.5% return, his short portfolio suffered a slight loss, according to his firm’s letter. He exited at least two short positions by quarter-end: Avalon Bay (AVB) and MBIA (MBI).
Avalon Bay (AVB)
Einhorn started short selling Avalon Bay in early 2007, in an initially spot-on call. Avalon shares tumbled from an all-time high beyond $145 in the first quarter to below $42 by early 2009. As he says in his letter, his error was that his team “overstayed our welcome.” Gains erased as the stock traded up over subsequent years to a current 52-week high of $151.23.
Avalon’s stock price has increased along with the rising popularity of real estate investment trusts (REITs) among investors. The average residential REIT yields 3.4% and the average financial REIT 6.3%, according to ReitMonitor.com, which is particularly attractive in a world of historical low interest rates on bonds. Avalon Bay’s dividend yield stands at 2.99%, with a 2.1% growth rate over three years – actually lower than 88% of the 249 in the global residential REIT industry as its stock increased.
At March 31, 2013, AvalonBay owned interest in 272 apartment communities directly or indirectly, with 81,279 apartment homes across 12 states and Washington, D.C. These communities are located in “17 high barrier-to-entry markets characterized by a low supply of zoned apartment land and lengthy and contentious entitlement processes,” according to the company.
Einhorn, however, left his short position with the diss: “It is a mediocre business with cyclical valuation due to its REIT nature.”
Shares slumped slightly over the past few months as the company acquired a portfolio of high quality apartment communities in coastal markets from Archstone Enterprise LP, for which it issued almost 15 million shares of common stock.
AvalonBay trades for a P/E of 30.90, P/B of 2.23 and P/S of 12.54.
On the long side, Ray Dalio closed out his remaining 10,535 shares of AvalonBay in the first quarter. Steven Cohen, Chris David and Manning and Napier Advisors took advantage of the fourth quarter of last year’s slump to add to their positions.
Einhorn also announced a victorious exit from an MBIA (MBI) short launched in 2002. Like many of his public short positions, Einhorn believed he had uncovered “assorted accounting and business chicanery” at MBIA, but it took five years before the company saw consequences in its stock price: It fell from $76 to $2 from 2007 to 2009.
“While it is possible that sleepy regulators will ultimately put this company and its management out of their misery, the opposite seems equally possible. We’ve decided to enjoy the healthy profit we made and step aside for the time being. Cumulatively, this was the third most profitable short position in our history,” Einhorn’s letter said.
In 2002, MBIA traded between approximately $37 and $59 per share. It went on to touch as high as $73 in 2007, before its precipitous collapse at the end of that year.
Einhorn may have closed the position as a critical legal decision was pending in a case related to restructuring and residential mortgage-backed securities transactions open since the 2008 credit crisis. On May 9, the case was settled with Bank of America (BAC) agreeing to pay the company $1.7 billion net. The news lifted shares approximately 57%.
The company also settled with Societe Generale and Flagstar in May, which “improved its liquidity profile” and “reduced the risk of regulatory intervention against it,” MBIA President and CFO Chuck Chaplin said in the company’s first quarter results statement.
“Although there are yet volatile structured exposures that we expect to commute, and litigations with investors and mortgage originators that need to be settled or adjudicated, the risk profile of the company has been substantially improved since we last reported,” he added.
On the long side, Bruce Berkowitz decreased his position in MBIA by 26% in the first quarter, or 16.3% of the company’s outstanding shares, though other of Fairholme’s funds own as much as 10% and 22% of the company. Berkowitz started investing in MBIA in 2010 as part of his all-in bet on troubled financials. One of his funds now shows a 77% gain from his average purchase price.
As the crisis-era litigation mess began to clear in the fourth quarter 2012, Francis Chou and Whitney Tilson established position in the company, and Jim Simons and Steven Cohen added to the existing positions.
Up 1.82% on Monday, MBIA is trading for $15.70, with a P/E of 2.4, P/B of 0.94 and P/S of 1.23.
See David Einhorn’s long portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of David Einhorn.