In the third quarter, the pain at David Einhorn (Trades, Portfolio)’s hedge fund Greenlight Capital Inc. intensified. The 14.2% decline dragged his nine-month loss on the value of his investments to 16.9%, compared to a 12.3% drop for the S&P 500, meaning 2015 is shaping up to be his first year in the red in five years.
The poor performance at the $12.3 billion firm was not entirely attributable to Greenlight’s long positions. Einhorn had only 20.9% net long exposure as of June 30, as he conservatively positioned his portfolio for a more negative economic environment and invested in other instruments.
“Our goal for 2015 continues to be to protect capital in an uncertain environment and to find investment opportunities on both our long and short portfolios that we believe will generate positive returns, Einhorn said in his second quarter letter. “Equity market valuations are stretched while monetary policy remains very accommodative globally.”
One of the other detractors was Einhorn’s position in gold, which he had previously commented would see higher prices as central bank stimulus spurred inflation. The investor listed it among his fund’s six largest positions, but rather than rallying as anticipated this year, the metal declined 6% through September.
In addition, Einhorn kept“macro positions in the form of options on foreign exchange rates, short positions in sovereign debt and sovereign credit default swaps,” “given the current market environment.”
When it came to stocks in the third quarter, several of Einhorn’s selections went in extreme directions: some cratered while others appreciated even more. The following are the value investor’s biggest hits and misses of his current holdings as of the third quarter.
His largest contributor, Einhorn started the position in Spirit AeroSystems Holdings Inc. (SPR, Financial) in first quarter 2013 when its average price was $17 per share. For the whole position acquired over several more quarters, he paid $21 per share. At a price around $48.68 per share on Tuesday, Einhorn has more than doubled his investment in the company, with a 111% gain.
Yet the compan’y shares moved on some short-term news during the quarter, including Warren Buffett (Trades, Portfolio)’s purchase of Precision Castparts (PCP, Financial), which lifted aerospace stocks, and analysts’ consensus estimates of lower EPS for the third quarter, scheduled for announcement on Oct. 29. In all, shares declined 12.5% in the third quarter.
Spirit Aerosystems, a maker of non-original aircraft parts, in the second quarter reported revenue of $1.699 billion, down from $1.8 billion year over year, with declines across all three segments. EPS increased to $1.09 from $0.98 year over year. The company also confirmed its guidance for the year and increased its expectation of free cash flow from a range of $600 million to $700 million, to a range of $700 million to $800 million.
Einhorn’s second-best holding, Apple Inc. (AAPL, Financial), was also his largest at second quarter-end, at 11.6% of his portfolio. The position appeared in Greenlight’s portfolio in second quarter 2010 when its price averaged only $36. The subsequent purchases came at a price average of $56 per share, giving Einhorn a 77% gain on the investment at Apple’s Tuesday trading price around $114 per share.
But, like Spirit Aerosystems, Apple stock also declined in the third quarter by 11.4% and declined less than a percent in the first nine months. Apple introduced the new iPhone 6S and iPhone 6S Plus to the market on Sept. 25, which has failed to enliven the stock. The company, however, announced it sold a record 13 million of the devices in the first three days.
Mario Gabelli (Trades, Portfolio), a fellow investor in Apple, commented on the company in his Oct. 19 letter to shareholders, saying of his holdings, “Favorable earnings prospects do not necessarily translate into higher stock prices, but they do express a positive trend that we believe will develop over time.”
Gabelli commented on Apple: “Apple designs Macs, arguably the best personal computers in the world, along with OS X, iLife, iWork, and professional software. Apple leads the digital music revolution with its iPods and iTunes online store. Apple has reinvented the mobile phone with its revolutionary iPhone and App Store, and is defining the future of mobile media and computing devices with the iPad and Apple Watch.
Einhorn’s biggest loser was Consol Energy (CNX, Financial), his fourth-largest holding at 6.2% of his portfolio and almost 10% of its shares outstanding. Consol, which is struggling with low natural gas prices, has declined 66% from his average purchase price of $30 per share, to around $10 per share on Tuesday. Though shares have declined 69% year to date, Einhorn continued to buy shares of the energy company in the second quarter, increasing his position by almost 11%.
The investor said of the company in his second quarter letter:
“While natural gas prices were stable during the quarter, coal prices fell about 10%. Near-term this is not a significant concern, as CNX price are locked in under long-term contracts for almost all of 2015 and about half of 2016-2018 production.”
“Assuming unhedged forward pricing for coal and natural gas, our long-term resource runoff model values CNX at about $35 per share. This is based on depressed commodity prices and does not give credit for the company’s implementation of zero-based budgeting, which should further improve its position as the low-cost supplier.”
For the second quarter, Consol reported a net loss of $603 million, or $2.64 per diluted share, compared to a net loss of $25 million, or $0.11 per diluted share in the same quarter a year previously. The net loss resulted primarily from an $829 million impairment on the carrying value of assets due to depressed oil prices. Revenue also fell to $648.9 million from $937.4 million in the second quarter last year, despite a 45% increase in production.
SunEdison (SUNE, Financial), the world’s largest renewable energy development company, ranked as Einhorn’s second biggest decliner. At 9.3% of his portfolio, SunEdison also took second place among Einhorn’s top holdings. He has a total 49% paper loss on the position, having paid $18 per share on average while shares traded around $9 on Tuesday – near a two-year low. Einhorn started the position in fourth quarter 2013 at an average price of $11 per share.
SunEdison stock began their descent from their 52-week high on July 29 when the company announced plans to acquire Vivint Solar (VSLF) a provider of residential solar systems, for $2.2 billion, as well as its rooftop solar portfolio along with a subsidiary of TerraForma Power (TERP, Financial), a clean energy power plant company.
On Aug. 6, SunEdison reported net sales of $455 million, compared to $431 million in the second quarter the previous year. It also reported a net loss of $256 million, or $0.89 per diluted share, from $51 million, or $0.16 per diluted share, a year previously.
Einhorn discussed the company in his second quarter letter:
“SUNE recently filed for TerraForm Global (GLBL) to go public. GLBL is a renewable energy yieldco located in emerging markets including Brazil, China, India and South Africa. GLBL will provide a new stream of cash flow to SUNE in the form of dividends and incentive distributions, similar to the structure of the existing yieldco TerraForm Power (TERP, Financial). Further, earlier this year SUNE acquired First Wind, the largest wind power development company in the United States. GLBL and First Wind add $10-$11 to our sum of the parts valuation.”
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