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Rupert Hargreaves
Rupert Hargreaves
Articles (660)  | Author's Website |

David Einhorn: Down 26% Year to Date, Sticks With Strategy

Einhorn isn't giving up on his favorite positions

October 08, 2018 | About:

I have been following the fortunes of Greenlight Capital closely this year because I'm interested in how David Einhorn (Trades, Portfolio), who has achieved one of the best long-term investment records in the hedge fund industry, is coping in one of the toughest periods for himself and his investors since the beginning of his career.

The third quarter was yet another tough period for Greenlight. According to a copy of the firm's third-quarter letter to investors, for the period, the fund lost 9.1%, bringing the year to date to a staggering 25.7%. Over the same period, the S&P 500 has achieved a positive return of 10.6%, which implies an overall underperformance of 36.3%. There is only one way to describe this performance: terrible.

Before taking a look at what has gone wrong for the fund this year, there is one particular position Einhorn mentioned in his latest letter that has been by far the largest winner for the firm over the past eight years. This specific position is Apple (NASDAQ:AAPL), which the funds sold out of entirely during the third quarter of 2018.

First purchased in May 2010, Einhorn initially paid $38 per share on a split-adjusted basis for the stock. Over the next few years, he noted in the letter that Apple went on to compound annually at 26% and earned more than $1 billion for Einhorn and partners.

Apple has turned out to be one of Greenlight's most profitable positions over the years, but at one point, soon after initially acquiring the holding, the stock dropped nearly 50% (something Einhorn covered in his letter). Looking back at this event, Einhorn compared the situation to today in his letter:

"As we recount the AAPL story and think back to the spring of 2013 as our largest position moved sharply against us, it basically feels the same today – but now the market appears to be rejecting our entire strategy of value investing, and the mark-to-market losses have affected nearly our entire portfolio. Just like with AAPL in 2013, few agree with us on most of our positions."

Greenlight: Multiple losers

It is fair to say that Greenlight is bleeding from multiple wounds this year. Almost all of the positions in the hedge fund's portfolio have moved against it, but despite this, Einhorn and team remain convinced that what they are doing is right. Holdings such as GM (NYSE:GM), Brighthouse Financial (NASDAQ:BHF) and Bayer (BAYN) remain financially and fundamentally strong, but the market is not willing to award these companies the multiples they deserve.

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In many ways, it seems that this is a microcosm of the wider market environment. This is something Einhorn also touches on in his letter:

"The current market view is that profitless companies with 20-30% top-line growth are worth 12x-15x revenues, while profitable companies that lack that level of opportunity are worth only 5x-8x after tax earnings. As an arithmetic exercise, if you pay 12x revenues for a company that eventually makes a 10% after tax margin and trades at a 20x P/E, the company has to sustain a 25% growth rate for 8 years for you to break even, and for 12 years for you to make an 8% IRR (requiring 15x revenue growth). If the company is increasing the share count by paying employees in stock, the math gets worse."

This is not some bruised hedge fund manager complaining that the market is not moving in the way he likes. Instead, it seems that this is a reflection of the environment that all value investors are struggling with at this moment in time.

What's fascinating to me is not where Einhorn is losing the money but how he is dealing with the losses. Instead of panicking and selling up, the experienced value investor has doubled down. The team at Greenlight is spending more time researching the companies it owns and confirming the investment thesis for each:

"During September we spent two days offsite reviewing the entire portfolio. As a result of that process we made some changes to the portfolio – some of which we are still implementing. But, the bigger take-away is that we believe we have a deep understanding of the fundamentals of the companies we are invested in and the perceived misunderstandings by the market."

This is some interesting guidance on how to deal with losses from one of the most experienced value investors of all time.

Disclosure: The author who owns no stock mentioned.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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