David Einhorn (Trades, Portfolio) is one of my favorite value investors. Even though his returns have suffered this year, over the long term his performance cannot be criticized -- he has proven that he knows a thing or two about value investing during his career as a fund manager.
From inception (May 1996) to the end of 2016, Greenlight returned 2,090% cumulatively or 16.1% annualized net of fees and expenses.
Unfortunately, while 2017 was a lousy year for Einhorn and Greenlight (the hedge fund produced a return of only 1.6% for the year net of all fees and expenses. For the fourth quarter, the fund was down 1.6%.), 2018 is shaping up to be the worst year of his entire career.
The worst year
According to the fund's first quarter letter to investors, Greenlight Capital lost 13.6% in the first three months of the year alone, the sixth time in the fund’s 22-year history that it has experienced a quarterly loss higher than 5%.
In January of this year, Greenlight had its worst monthly performance relative to the S&P 500 in the fund’s history. It has since been reported that two of the fund's most substantial holdings were up in the mid-teens for May, blunting some of the losses.
The question is, what has gone wrong for this highly regarded value investor in 2018?
What has gone wrong
The answer to this question might not be as complicated as it first seems. At the end of the first quarter, the largest two positions in the Greenlight portfolio were Brighthouse Financial (BHF, Financial) and General Motors (GM, Financial). Neither of these stocks have registered a positive performance this year. The positions, which together account for 35% of the equity portfolio, are down by 23% and 4%, respectively, this year.
Brighthouse is interesting here. Since its initial public offering during July last year, shares in the company have lost around 40% of their value. When he initially took a stake in the business, Einhorn noted that the stock was cheap at the time, and now it's even cheaper. Here's what I wrote when covering the Brighthouse position at the end of January:
"Greenlight’s other interesting value play is Brighthouse Financial, which was recently “spun out of MetLife and was formerly most of MetLife’s (MLU, Financial) U.S. Retail business, selling annuities and life insurance.” It seems everyone hates this company. According to Einhorn’s letter, the “tone of the spin-off road show was noticeably downbeat, with management advancing a business plan that does not sound particularly exciting for shareholders.” Unsurprisingly, this resulted in a busted initial public offering with the stock falling 25% in the months after hitting the market. While no capital return is expected until 2020, the stock has a valuation of “just 56% of book value and 6.4x 2018 EPS estimates...Einhorn believes Brighthouse has “cushion built in for a bear market.” Using conservative estimates, he thinks the stock could be worth 40% to 50% more compared to peers."
So what has changed since Einhorn issued this thesis? Well, the company reported a net loss of $67 million, or 56 cents per share, in the first quarter of 2018, up from $349 million in the first quarter of 2017. Meanwhile, the company ended the first quarter of 2018 with stockholders’ equity of $13.6 billion, or $113.61 per share.
Based on these figures, the company is trading at a price-book ratio of 0.4. Wall Street is predicting earnings per share of $8.50 for 2018, giving a forward price-earnings ratio of just 5. Initially, there seems to be no severe change to the original investment thesis proposed.
The primary headwind to the stock price right now is selling pressure from institutions, particularly the former parent MetLife. Earlier this month, MetLife dumped 23,155,117 shares of Brighthouse common stock on underwriters to offload to the market. With just 120 million shares outstanding, and an average daily volume of 1.2 million shares, this could be a substantial overhang on the stock price.
This is not designed to be a thorough analysis of Brighthouse. It is just interesting to note that one of the highest conviction positions, in the portfolio of one of the world's best value investors, is only getting cheaper -- and may get cheaper still as large owners continue to sell.
Disclosure: The author owns no stock mentioned.
