In his letter, the value investor pointed to the data that value has started to outperform growth over the past six months while inflation expectations have recovered to 2.5% from the March 2020 low. Only time will tell if this trend will persist. However, in 2016, when inflation expectations jumped from 1.5% to 2.3%, "that was the only year in the last decade in which value outperformed growth."
For his part, Einhorn has stuck with value stocks during this period of underperformance. It seems as if his conviction is finally starting to pay off.
Einhorn sticks with value
Last year, Greenlight's most significant long investment, Green Brick Partners Inc. (GRBK, Financial), doubled in value. Commenting on the stock's performance in his letter, the value investor explained:
"Full-year 2020 earnings per share were up 97%. More importantly, its backlog grew 86%, and its lot position grew 61%. In early 2021, the business accelerated further, with new orders up 80% through February, ahead of last year's 76% growth...Normally, the business is limited by sales. Currently, Green Brick is limited by how many houses it is able to build and how quickly it is able to build them."
The letter explained that 2021 could be yet another year of impressive growth for the business.
However, based on last year's earnings of $2.23 per share, it is selling in the market at a price-to-earnings ratio of 11.
Why is Green Brick so cheap? It seems Greenlight may have to take some of the blame.
Einhorn explained in his letter that after last year's outstanding performance, Green Brick had become "an excessive weighting within our portfolio." As a result, the hedge fund sold 25% of its shares in an underwritten offering. The letter noted that it "took a while for the market to digest the shares." This ultimately led the stock to underperform its sector peers during the first few weeks of 2021.
To put this sale into perspective, at the end of 2020, according to Greenlight's 13F filing, the firm owned 24.1 million shares in Green Brick, which were worth $554 million. It made up 34% of the hedge fund's equity portfolio at the end of the year. A quarter of this holding would be about 6 million shares, or 6 times Green Brick's average daily volume of one million.
Now that this enormous backlog has been cleared, there could be a strong chance that Green Brick will move substantially higher over the next few months as the company's growth continues to build.
Indeed, Einhorn and other analysts believe the U.S. housing market is on the edge of a multiyear growth spurt, powered by low interest rates and rising property prices. Green Brick could offer growth at a reasonable price considering its current valuation and potential over the next few years.
Greenlight value holdings
Other holdings in the Greenlight portfolio may also be appealing for value investors. As well as Green Brick, the hedge fund also owns Brighthouse Financial Inc. (BHF, Financial), which added 22% in the first quarter of 2021. This stock is currently selling at a price-book ratio of 0.2 and a price-earnings ratio in the low single digits. This was Greenlight's second-largest holding at the end of 2020 with an 8% portfolio weight.
Greenlight owned 2.3 million shares. The stock added 29% in the first quarter after acquiring GE Capital's aircraft leasing business at a discount. Buying this business at a discount in a depressed market could help AerCap capitalize on the post-pandemic recovery.
Disclosure: The author owns no stocks mentioned.
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