In a conference call Wednesday, Greenlight Capital investor David Einhorn (Trades, Portfolio) shed some light on the reasons for lackluster returns, attributing the year’s loss primarily to a long position in Brighthouse Financial (BHF, Financial) and a Tesla (TSLA, Financial) short.
Einhorn, who obliterated the S&P 500 in the 2000s, reported a 3.8% loss for the second quarter and 0.2% decline for the month of July. The performance brought his loss for the year through July to 15.4% versus a 5% gain in the S&P 500. Without a turnaround, Einhorn could be on track for his worst year since 2015, when his returns dipped 20.2%, the lowest his firm has recorded. Einhorn did even better in 2008 with a 17.6% loss versus a 36.79% dive in the index.
One staid life insurer and an electric car company with an audacious CEO are largely to blame. Shares of Brighthouse Financial tumbled 25% in the first seven months of the year. The company represents Einhorn’s second largest position, behind General Motors (GM, Financial), at 14.2% of the reported equity portfolio. Einhorn holds 11.04 million shares purchased through the third quarter of 2017 to the first quarter of 2018. Share price averages for those months place his estimated loss near 27%.
Einhorn discussed the company’s slide in Wednesday’s conference call, saying he remained confident in his thesis:
“Biggest detractor to performance in the quarter was Brighthouse Financial, the spinout from Metlife that sells annuities and life insurance. We first purchased the stock in the third quarter of last year. At the time, the market did not expect the company to return capital until 2020. Since the spin, the company has executed according to our expectations, and has made progress toward returning capital earlier than originally forecast. Despite this, the stock ended the quarter at 37% of book value and less than 5 times earnings. Comparable businesses trade at significantly higher multiples. We believe Brighthouse shares are extremely undervalued, and it remains one of our highest conviction longs.”
Tesla surged in the second quarter for a 5% gain year to date. Einhorn did not mention closing the short in his comments on the call:
“It was another difficult quarter in our short portfolio as some storied stocks continued their ascent despite what we view as increasingly deteriorating fundamentals. Tesla shares rose 28% in the quarter and was our second biggest loser. Manufacturing problems continued yet the stock jumped after the CEO promised the short burn of the century on Twitter. Despite short-term production surge theatrics, the company missed all of its material manufacturing targets and financial projections. Losses at the company are mounting and the emergence of viable competition for electric vehicles is eroding Tesla’s long-standing first mover advantage.”
Elon Musk, Tesla’s CEO, blasted Einhorn on Twitter on Wednesday afternoon.
“Tragic. Will send Einhorn a box of short shorts to comfort him through this difficult time,” Musk tweeted.
Tesla has zapped Greenlight’s returns in the past, ranking as one of its biggest losers in the first quarter of 2017, when Einhorn again lamented Musk’s Twitter taunts.
“With holders reluctant to sell, the stocks can only go up – seemingly to infinity and beyond,” Einhorn wrote in a letter at the time. “We have seen this before. It’s painful for the shorts, as the TSLA CEO has been happy to remind everyone via Twitter.”
Although Einhorn questioned the value of value investing in a letter last year, he remained devoted to the fundamentals-focused approach that led him to his current portfolio of stocks.
“This has been a frustrating environment for us and for value investing style,” he said on the call. “AllianceBernstein recently reported that value investing strategies are performing in the bottom percentile since 1990. Reality is that the market is cyclical and given the extreme anomaly, reversion to the meanship happens sooner rather than later, we just can’t say when."
See David Einhorn (Trades, Portfolio)'s portfolio here.
