David Einhorn (Trades, Portfolio)'s Greenlight Capital's quarterly letter revealed the fund returned 1.3% for the quarter with the S&P 500 up 6.1%. Given Greenlight is only 28% net long, it makes sense for the firm to return about one-fourth of what the S&P 500 did, although it was not a quarter where it generated any visible net alpha.
Its largest disclosed long positions are now  AerCap Holdings (AER, Financial), Bayer (XTER:BAYN), Consol Energy (CNX, Financial), General Motors Co. (GM, Financial) and gold (GLD, Financial). It is funny how Einhorn always speaks of disclosed positions, which implies there could be some big ones he did not disclose. But as long as I have been reading these letters, he does not waver from that language. Einhorn is supposedly a stellar poker player and these little things betray that. Poker players learn to be very consistent in how they express things, in the game or in language, as not to give away information inadvertently.
Apple (AAPL, Financial), Chemours (CC, Financial) and gold were the biggest winners. The secretive bubble basket, Rite Aid (RAD, Financial), which is a merger arbitrage, and a short Tesla (TSLA, Financial) were the big losers. Einhorn on Apple:
"AAPL advanced from $115.82 to $143.66 as it reported a good quarter and the market is now realizing it is not the next Nokia or BlackBerry. AAPL’s market position is durable and its ecosystem is expanding with high-margin recurring services revenue streams. We continue to like AAPL because we think it is a superior company that still trades for less than a market multiple."
Given it was not mentioned among the largest disclosed longs, I believe he did sell a number of shares. On gold (GLD, Financial):
"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."
It is clearly a hedge, but not a bet on a particular pending crash. On a merger arbitrage gone wrong (do not try this at home):
"RAD fell from $8.24 to $4.25. We had expected that Walgreens (WBA) and RAD would satisfy regulatory concerns and close the merger at $9 per share. Instead, the deal was re-cut to between $6.50 and $ 7.00, and even at this date, the regulatory concerns are not resolved. We are watching the situation carefully and we have trimmed the position, as our original thinking was incorrect."
Somewhat curiously, the firm trimmed the position because the original thinking was incorrect. This indicates the managers sense it is still a good bet but are not sure their behavioral biases are not blinding them and are taking off some of the risk.
The best part is about investors' fan favorite Tesla, which he blasts along with Musk (emphasis mine):
"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."
Einhorn managed to be quite funny about a situation that must be very painful, to watch this bubble basket of what he deems incredibly overvalued stocks detracting from Greenlight's performance year after year after year. I think we are in the third year where these go against Greenlight in a big way and obscure how great of a fund Greenlight Capital really is. OK, I admit I am a pretty big fan of his style of investing and absolutely loved "Fooling Some People All of the Time."
To end this review of Greenlight's letter, let me go out with his commentary on General Motors. Greenlight came out with a presentation calling for a new share class to be instituted at General Motors, with a focus on a dividend:
"In the case of GM, we felt the need to press the issue as we believe there is a lot of value to unlock and the company did not fairly evaluate our idea. Management made a decision and then spent a great deal of effort coming up with reasons to justify that decision. To poison our idea, management went so far as to misrepresent our proposal to the credit rating agencies, allowing them to claim that the company’s credit standing would be in jeopardy if it implemented our idea. Ironically, our idea was designed to be credit positive and the least invasive way to unlock billions of dollars of shareholder value. This sort of behavior by management leaves us no room to agree to disagree.
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."
It appears Greenlight is not done with General Motors and is going to put on the heat. It is a bit dissapointing that management did not listen to Greenlight's points. I will be very interested in seeing how this saga continues.
Disclosure: Author doesn't own any securities mentioned, but is long a gold ETF (IAU).
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