David Einhorn (Trades, Portfolio)’s $7 billion Greenlight Re hedge fund turned in its worst performance ever compared to the S&P 500 in January.
Einhorn’s long portfolio declined 5.5% for the month, versus the nearly 6% rise in the S&P 500. The short portfolio more than doubled the index.
“While we’ve never underperformed like this, our prior worse underperformance compared to the S&P came in March of 2000, which was a similar environment,” Einhorn said Wednesday in a conference call to discuss his reinsurer’s fourth-quarter results. “We are managing the gross exposure prudently while maintaining exposure to the fundamentally challenged shorts that hurt us.”
Shorts in Caterpillar (CAT, Financial) and Continental Resources were the biggest detractors for Greenlight for the fourth quarter. Caterpillar, the industrial equipment maker, gained 26% after beating margin expectations. Einhorn remained positive on the company, saying he expects the rise to be temporary due to headwinds from raw materials.
Continental leaped 37% on a 17% gain in oil prices.
Einhorn’s hedge fund has struggled to beat the market in recent years. For 2017, it returned 1.5% and in 2016, it lost 0.1% as the market soared. He expects value stocks like those in his portfolio to return to favor soon, he said.
“While the environment has remained difficult with growth stocks accelerating their outperformance against value stocks this year including February, we think a reversion may finally be coming soon,” Einhorn said. “Corporate tax cuts are a benefit to companies with profits which are a hallmark of our long portfolio. Higher interest rates are beginning to offer investors an alternative they haven’t had in many years and should render uncertain future profits of levered business and storied stocks less valuable. The valuation spread between our longs and our shorts is incredibly wide.”
Einhorn’s biggest winners for the quarter were drug manufacturer Mylan (MYL) and coal producer Consol Energy (CEIX, Financial).
Mylan, the fourth largest position in Einhorn’s portfolio, advanced almost 40% in the fourth quarter after the FDA approved a generic version of Teva Pharmaceuticals (TEVA, Financial) multiple sclerosis drug Copaxone.
Consol Energy spun off from CNX Resources Corp. (CNX, Financial) in November. Einhorn held 17.8 million shares of the natural gas company CNX Resources and 2.23 million shares of the coal company Consol Energy at the end of the quarter. Consol has soared about 40% since the spinoff.
“Both companies have high-quality resource positions, favorable cost structure and strong management teams,” Einhorn said.
A fourth-quarter portfolio update from last week showed that Einhorn bet on Twitter (TWTR, Financial), Time Warner (TWX, Financial) and Ensco (ESV, Financial) as his largest new buys.
See Einhorn's portfolio here.
