David Einhorn (Trades, Portfolio)'s Greenlight Capital increased its position in Brighthouse Financial Inc. (BHF, Financial) during the third quarter of 2021, according to the hedge fund's latest 13F report.
This position is the second-largest holding in Greenlight Capital's portfolio, according to the report. However, investors should remember that 13Fs only contain U.S.-listed common equity holdings, so it is possible the firm has larger investments in other asset classes.
Greenlight increased its position in Brighthouse by around 8% last quarter, taking the holding up to just over 3.9 million shares. Einhorn has owned the stock since the company was spun off from its parent, MetLife (MET, Financial), in 2017. He has long believed that investors are undervaluing the enterprise and misinterpreting its business model and exposure to market volatility.
The position has not been a winner for the fund manager so far. From its spin-off price of around $69, it plunged to a low of around $16 at the end of March 2020 before rallying to nearly $54 as of the time this article is being written.
Brighthouse's performance is one of the reasons why Greenlight's overall performance has deteriorated in recent years. Einhorn was considered to be one of the best value investors around due to his bold investment calls and impressive investment returns before the financial crisis.
Between inception in 1996 and 2008, the fund achieved annualized returns of 26%. Einhorn's decision to short Lehman Brothers in 2007 was one of his greatest calls. Assets under management at the hedge fund hit $12 billion in 2014.
Today, Einhorn manages just $1.5 billion. His fund has consistently underperformed since the financial crisis, and investors have fled.
The Brighthouse opportunity
While there is no denying that the value investor has reported lackluster returns over the past few years, I still keep an eye on his ideas. He has not lost his ability to find undervalued equities, in my opinion.
Brighthouse is one of those ideas. It does not take much research to discover that the company is cheap. A quick look at any valuation website shows that the stock is trading at a price-book ratio of 0.3 and a price-earnings ratio of just 3.7.
The company is taking advantage of this. It has reduced the number of shares outstanding from 120 million to 84 million through share repurchases since 2018. More are planned. It recently authorized another $1 billion of buybacks. This would retire another 23% of its outstanding shares at current prices.
This is a fascinating situation. If Brighthouse continues on its current course, the company will have retired almost all of its outstanding shares by 2023 or 2024. As I have not conducted a detailed financial analysis on the business, I cannot say whether this will happen. Nevertheless, looking at the company's progress over the past three years, I could make a good argument that over the next few years, Brighthouse will almost certainly reduce its number of outstanding shares substantially.
As buybacks continue, the stock is only going to become cheaper. Book value per share has increased from around $120 in 2017 to $175 today. The more shares the company repurchases, the more undervalued the business will become, assuming the market does not wake up to the opportunity here.
Brighthouse's downfall is the fact that the company is relatively difficult to understand. Its core business is variable annuities and life insurance. This sort of long-tail insurance is very difficult to analyze, as even a small change in interest rates can substantially impact asset values.
This may explain why the market is unwilling to give the company a high multiple. As long as investors continue to hold this view, Brighthouse has the opportunity to buy on the cheap. Perhaps someday, the investment could pay off in spades.