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Sydnee Gatewood
Sydnee Gatewood
Articles (3598) 

David Einhorn Pares Green Brick Partners Holding

Guru curbs largest position as company issues secondary offering

Greenlight Capital leader David Einhorn (Trades, Portfolio) disclosed earlier this week he trimmed his stake in Green Brick Partners Inc. (NASDAQ:GRBK) by 24.84%.

The activist investor's New York-based firm seeks long-term capital appreciation by taking an approach rooted in emphasizing intrinsic value, investing in companies that have the potential to achieve consistent returns and safeguard capital regardless of market conditions. Einhorn is also known for his short positions, which include Tesla Inc. (NASDAQ:TSLA) and Netflix Inc. (NASDAQ:NFLX).

According to GuruFocus Real-Time Picks, a Premium feature, Einhorn divested of 5.9 million shares of the Plano, Texas-based company on Jan. 25, impacting the equity portfolio by -10.26%. The stock traded for an average price of $20.97 per share on the day of the transaction.

The guru now holds more than 18 million shares, representing 34.58% of the equity portfolio. It was also Einhorn's largest position as of the end of the second quarter of 2020. GuruFocus estimates he has gained 148.14% on the investment so far.

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Operating in Texas, Georgia, Florida and Colorado, the homebuilding and land development company has a $1.01 billion market cap; its shares were trading around $19.74 on Friday with a price-earnings ratio of 10.2, a price-book ratio of 1.66 and a price-sales ratio of 1.07.

The GF Value Line suggests the stock is currently significantly overvalued based on its past performance, future projections and historical multiples.

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On Jan. 22, Green Brick released select preliminary results for fourth-quarter and full-year 2020. For the full year, it is expecting diluted earnings in the range of $2.21 to $2.23 per share on between $929 million and $931 million in residential units revenue.

In a statement, CEO Jim Brickman noted that 2020 was a "breakout year" for the company and is in a good position to "deliver strong growth again in 2021."

"During the quarter, our record 848 net new orders occurred at all home builder brands and price points, outpacing our available inventory," he said. "We ended the quarter with a $687 million backlog – the highest in our history and up 98% year over year. We reacted to the supply shortage quickly and started a record breaking 1,004 homes in the fourth quarter which is up 99% over the same prior period. Put simply, short-term demand exceeded our supply, and we have rapidly expanded our capacity."

Green Brick will release its official financial results after markets close on March 8.

The company also announced on Jan. 25 a 6 million-share secondary public offering of its common stock by certain affiliates of Greenlight Capital. Underwriters were also given a 30-day option to buy up to an additional 900,000 shares from selling shareholders. Green Brick itself did not offer any shares, nor will it profit from the proceeds.

The $125.7 million offering closed on Jan. 27.

GuruFocus rated Green Brick's financial strength 5 out of 10. Despite issuing approximately $103.6 million in new long-term debt over the past three years, it is at a manageable level. The Altman Z-Score of 4.73 also indicates the company is in good standing even though assets are building up at a faster rate than revenue is growing. The return on invested capital also surpasses the weighted average cost of capital, indicating good value creation.

The company's profitability scored a 6 out of 10 rating. Although the operating margin is in decline, it still outperforms over half of its competitors. Green Brick also has strong returns, a moderate Piotroski F-Score of 6, which implies business conditions are stable, and a predictability rank of one out of five stars. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.

With a 35.78% stake, Einhorn is by far the company's largest guru shareholder. Diamond Hill Capital (Trades, Portfolio), Hotchkis & Wiley, John Rogers (Trades, Portfolio), Third Avenue Management (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) also have positions in the stock.

Portfolio composition and performance

Einhorn's $1.23 billion equity portfolio, which was composed of 36 stocks as of Sept. 30, is most heavily invested in the consumer cyclical sector with a weight of 36.44%. The industrials space has a much smaller representation at 16.80%.

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Other consumer cyclical stocks the guru held as of the end of the third quarter were Crown Holdings Inc. (NYSE:CCK), Jack in the Box Inc. (NASDAQ:JACK), Dillard's Inc. (NYSE:DDS) and PVH Corp. (NYSE:PVH).

In 2019, Greenlight significantly underperformed the S&P 500 with a return of 9.3%. The index posted a 31.48% return. While performance data for 2020 has not yet been released, Bloomberg reported in November the firm was down 1.1% for the year after recording five consecutive months of gains.

Disclosure: No positions.

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