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Bram de Haas
Bram de Haas
Articles (316)  | Author's Website |

Why David Einhorn Is Betting Big on General Motors

A closer look at Greenlight Capital's outsized investment into General Motors

January 17, 2018 | About:

David Einhorn (Trades, Portfolio) is one of the gurus whose stock picks I always check for ideas.

I’m also invested in Greenlight Capital Re (NASDAQ:GLRE). Greenlight Re is a reinsurance company with its portfolio managed by Greenlight. Einhorn just released another quarterly letter to investors. The Greenlight Capital funds returned 1.6% over 2017. This is a hedge fund so you can’t compare it 1:1 versus the market. Greenlight had only two down years since inception. As far as I know, Einhorn is never 100% long. That means it is hard to keep up with the S&P 500. However, this kind of lag to the S&P 500 isn’t explained by lower market exposure. It’s clearly a bad year. Einhorn seeks part of the explanation in this market environment where value continues to lag:

"Last year the Russell 1000 Pure Growth Index outperformed the Russell 1000 Pure Value Index 38% to 4%. While it feels like we have been running face first into the wind, we don’t intend to capitulate and are sticking to our strategy of being long misunderstood value and shorting 'not value.'"

Since inception of Greenlight Capital the returns have been astounding. The firm returned 2,134% cumulatively since 1996. It has a great, friendly culture. Einhorn’s letters to partners tend to be available and demonstrate a strategy and executions that should lead to terrific results over time. His presentations at various investment conferences tend to be funny and intelligent. I’m quite confident he and his team will do well over market cycles. Hence my Greenlight Re position.

In this particular letter Einhorn talked extensively about position,s but I really wanted to highlight General Motors (NYSE:GM), making up 23% of the U.S. long book. Einhorn did something unusual: He listed why General Motors had a terrific 2017 in a large typeface and centered it:

Auto sales held up;

Used car prices did not collapse;

GM gained market share;

GM exited its structurally money-losing European division;

GM paid a 4.4% dividend (based on its year-end 2016 share price);

GM bought back a lot of stock (9% of its year-end 2016 market cap);

GM exceeded consensus earnings expectations by more than 10% every quarter;

2017 earnings estimates rose from $5.76 at the beginning of the year to $6.30 at yearend; and

GM presented a case that it is a leader in future automobile technologies (electric vehicles, autonomous driving, transportation as a service, fleet management and connectivity).

Unfortunately it only performed in line with the market during 2017, so it wasn’t enough to really help Greenlight with its relative performance. Given it has been such a productive year you would think it would have outperformed…


Auto manufacturing is a highly cyclical business. I will dive into the earnings in a second, but keep in mind we may be looking at top-of-cycle numbers. The market could be correctly forecasting a decline in revenue. Why it doesn’t do the same for many other cyclical businesses is something of mystery. The auto industry is so cyclical because in good time the firms all add capacity, ultimately driving returns on assets down towards their cost of capital or even below. American auto went through a deep restructuring after the crisis but is starting to be more aggressive, and foreign automakers from China and India may come to the U.S. soon. You could may think you’ll never buy a Chinese car, but people said that of Japanese cars once.

General Motors is one of many auto manufacturers in mexico, just likeNissan (NSANY), Mazda (MZDAF), Honda (HMC), Volkswagen (VLKAY) and Audi (AUDVF). General Motors has its trucks manufactured there, which helps to ward off potential competition from China and India.

President Trump talks about blowing up NAFTA, a trade agreement including Mexico, which is a concern. So far executives have been optimistic the administration will be smart about reforms. If Trump makes business a lot more difficult for General Motors, the good news is it won’t be the only company hurt. The bad news is Fiat Chrysler (FCAU) just moved some operations to Michigan.


General Motors just updated guidance before a presentation at a Deutsche Bank (DB) auto conference connected to the Detroit Auto Show. The company thinks it will hit $6 to $6.50 in earnings per share over 2017, and results over 2018 will be in line with that. That means it is trading at approximately 7x forward earnings, which is very, very cheap compared to the broader market. It also trades at 5.87x EV/EBITDA and at 4.14x net operating FCF. Even if we are looking at top of the cycle earnings this is cheap.

General Motors has a much-improved cost base, and it is unlikely to lose money even in a deep recession. Meanwhile, with just a couple of years where earnings go into slight decline, shareholders may have their money returned to them already. Einhorn probably estimates General Motors will do better.

Finally, Greenlight is trying to convince General Motors to engage in some financial engineering to unlock the value at the firm. It has been successful so far, but it’s usually a positive to have an engaged hedge fund on your side.

Disclosure: Author owns GLRE.

About the author:

Bram de Haas
Bram de Haas is the managing editor of The Black Swan Portfolio.

Visit Bram de Haas's Website

Rating: 5.0/5 (1 vote)



Dvanduin - 10 months ago    Report SPAM
When David Einhorn (Trades, Portfolio)'s is talking, I'm always listening!

Valuefan premium member - 10 months ago
I really like David Einhorn (Trades, Portfolio) too. He is one of the few hedge fund managers truly centered on value. I sold my GLRE though, because he will not reduce fees like some of

the other similar stocks. So I am in PSHZF since it will be a while till it hits the high water mark again,

and it also sells for a 19.61 % discount to NAV, as of 1/16/18.

Eagle Capital Management increased its GM stake to 3.5 % of its portfolio last quarter.

I have TSLA puts to balance out my GM stake.

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