David Einhorn (Trades, Portfolio)'s hedge fund, Greenlight Capital, ended 2020 on a high note. After a rough start to the year, Greenlight added 25% in the fourth quarter of 2020, making it the best quarter in its history according to the firm's full-year letter to investors.
Following this performance, the fund achieved a positive return of 5.2% in 2020, though this still significantly underperformed the S&P 500, which returned 18.4% for the same period.
Before one attacks the value investor for his relatively lackluster performance last year, one should consider the underlying figures that made up the overall performance. In the fourth quarter, Greenlight's long positions contributed 42%. Unfortunately, short positions and macro hedges detracted 14%.
Thus, it terms of the common stock holdings, it seems to me that Einhorn's decision to stick with undervalued stocks was well rewarded towards the end of last year.
The best performing investment was Green Brick Partners (GRBK, Financial), which surged from $16.10 to $22.96 per share as "strong results caused a significant upward revision to the forecasted earnings trajectory of the company." This was the largest position in the hedge fund's portfolio at the end of September 2020.
Einhorn has always specialized in finding undervalued securities with upcoming catalysts such as growth or a spin-off. This combination of value and growth investing requires effort, but it does produce returns.
Einhorn's value plays
One of the newest positions in Einhorn's portfolio is Resideo Technologies (REZI, Financial). According to his year-end letter, Resideo was spun out of Honeywell International (HON, Financial) in 2018. It is a residential HVAC and security business that generates strong recurring revenues through replacement sales into a base of 150 million homes. However, following problems after the spin-off, the firm's margins plummeted. According to Einhorn's letter, after watching the stock for some time, Greenlight used the March market slump to build a position, buying at an average price of $4.88 per share.
Going forward, he believes that the company is well-positioned to grow margins and benefit from pandemic-driven spending on home improvements. It has already started to record some of this improvement on the bottom line, and Einhorn expects that to continue going forward:
"We see the potential for this to continue and for earnings to grow from around $2 per share in 2021 to $3 per share in the coming years. The shares ended the quarter at $21.26 and REZI is now a medium-sized position."
Einhorn has already booked large profits on this trade, and it looks as if he thinks there could be more to come.
Another public investment the letter profiled was NeuBase Therapeutics (NBSE, Financial). The fund manager described what the business does in his 2020 letter:
"NeuBase is a "platform" company with a technology called PATrOL, which develops highly targeted therapies that increase, decrease or change the protein function of genes. By addressing all of the causal mechanisms underlying rare and common diseases – including cancer – PATrOL consolidates the capabilities of highly-valued gene silencing, gene editing and gene replacement companies in a single unified platform."
"The potential market for this product could be enormous," Einhorn added. However, the market is currently giving the company little credit. It has a market capitalization of just $200 million, which "prices in little chance of success."
Of course, there's plenty that could go wrong. Early-stage biotechnology companies are notorious for failing to live up to expectations. Nevertheless, this appears to be one of those opportunities with limited downside but considerable upside potential if everything goes to plan. In some respects, it's a classic Einhorn play. The stock looks cheap compared to its potential, and it appears as if the rest of the market is overlooking the opportunity. It may indeed be worth keeping an eye on NeuBase as its technology moves forward.
Disclosure: The author owns no share mentioned.
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