Regular readers of my articles will know that I follow the investment activities of David Einhorn (Trades, Portfolio) and his hedge fund Greenlight Capital closely.
I think Einhorn is a good value investor. His value stock picks have generated billions of dollars of wealth for his investors over the years, although his recent bets against tech stocks have hurt returns.
We only need to look at his fourth-quarter and full-year 2019 letter to investors to see just how damaging these anti-momentum bets have become. Last year, a year in which the S&P 500 index returned 31.5%, Greenlight's long portfolio returned 37.4%. However, its shorts lost 20.1%.
All told, the fund ended the year with a gain of 13.8% after fees and expenses.
Long-term returns
Over the long term, the hedge fund's returns are impressive. Since its inception in May 1996, Greenlight has returned 12.7% annualized net of fees and expenses, earning investors a total of $4.5 billion in profits over the same time frame.
With this being the case, it's worth keeping a close eye on Einhorn's long holdings. The value investor clearly knows how to find value, even if his short-selling activities are costing his investors money.
All of Greenlight's significant long positions are dealing at single-digit price-earnings multiples according to the hedge fund's full-year 2019 letter to investors.
Unloved stocks
These holdings include chemicals business Chemours (CC, Financial), which makes titanium dioxide and refrigerants.
According to the hedge fund manager, shares in this company are dealing at a forward price-earnings ratio of just 5.7. The market is worried about the company's exposure to historical liabilities, which were incurred under its parent company DowDuPont.
Einhorn and his team believe that these worries are vastly overstated. What's more, there is concern that Congress may pass legislation to address "forever chemicals" in a way that creates substantial new liabilities for the company. However, Grrenlight's analysts believe that these actions are aimed at the former producers of PFOS, a fire fighting foam, which Chemours never made nor sold. As a result, the market is overestimating Chemours' potential liabilities, according to the firm.
General Motors (GM, Financial) has been a long-term holding for Greenlight for many years. The stock is always struggling with one problem or another, but the fund believes that 2020 could be the year that the auto manufacturer is finally able to shake off its historical issues and start returning substantial amounts of cash to investors.
Over the past few years, the company has been focused on stabilizing and adequately capitalizing its financial arm, paying down pension liabilities and investing in new models and technologies. These efforts have reduced the amount of cash that is available for distribution to investors, but they've strengthened the core of the business.
This means that the company is well-positioned to restart share buybacks in 2020. What's more, Einhorn's team believes that the company could earn as much as $7 per share in 2020, which puts the stock on a forward price-earnings ratio of 5.8 with a 4.2% dividend yield.
The final Greenlight long that I'm going to cover in this article is Green Brick Partners (GRBK, Financial). One of the most expensive stocks in the long portfolio, Green Brick is trading at a forward price-earnings ratio of 9.5 based on 2020 earnings estimates. The stock returned 59% in 2019 after earnings recovered from a slowdown in 2020.
The property management and development company operates in growing markets around the United States and has more than tripled its revenues since going public in 2014. It seems that Einhorn is betting this trend will continue as the company's experienced management team capitalizes on the rising demand for new homes across the country.
Disclosure: The author owns no share mentioned.
Read more here:
- Revisiting David Einhorn's Brighthouse Financial Trade
- Warren Buffett: Read Books, Don't Play With Spreadsheets
- Warren Buffett: Focus on a Company's Future Earnings Potential
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