The final figures for David Einhorn (Trades, Portfolio)'s Greenlight Capital performance in 2018 are out, and they are not good. The hedge fund lost a total of 34.2% net of all fees and expenses for the year, underperforming the S&P 500 by 29.8%.
This performance would have ruined any normal investor, but Einhorn is not normal. He has one of the best performance records on Wall Street, which has undoubtedly saved his reputation.
As Greenlight's year-end 2018 letter to investors notes, since its inception in May 1996, the firm has produced a cumulative return for its investors of 1,367% or 12.6% annualized net of fees and expenses, outperforming the S&P 500 by several hundred basis points.
What went wrong?
So what went wrong for Einhorn in 2018? It seems everything. Longs fell, and shorts went up. At the end of the year, the partnership had an average exposure of 126% long and 67% short.
Starting with the short positions, as it is obvious where the firm went wrong here; Einhorn lost money on Tesla (TSLA) and Assured Guaranty (AGO). The latter of these is a bet on Puerto Rico's bankruptcy, which the firm believes will be worse than expected, and Assured Guaranty will have to take billions in losses thanks to its exposure to the state's debt. Tesla has its own problems.
These are the only two individual shorts noted in Einhorn's letter. He says the short portfolio is full of businesses with "flawed business models, questionable accounting and leadership, and obvious paths to serious problems."
The short portfolio aside, it's Einhorn's long portfolio that really looks interesting to me. This side of the portfolio is stuffed full of cheap stocks trading at a considerable discount to book value.
Einhorn's cheapest stocks
AerCap (AER, Financial) is an example. This business leases planes to airlines and is capitalizing on the worldwide boom in air travel. Since 2014, the business has reduced debt, repurchased 35% of its shares outstanding and grown book value by 15% per share annually. However, despite this performance, the stock fell 25% in December and was dealing at a forward price-earnings ratio of 5.8 at the end of the year, and only 65% of book value.
Then we have Brighthouse Financial (BHF, Financial). Einhorn says that he has never seen "a life insurer trading at this kind of valuation in a stable environment." The stock is trading at a forward price-earnings ratio of 3.8 and only 29% of book value after falling 48% in 2018. Heading into 2019, Wall Street is expecting the firm's earnings to "benefit from deposit growth, cost-cutting, shifts in the company's investment and hedging portfolios" and improved cash generation. Management is planning to buy back around $1.5 billion of stock by the end of 2021, which is approximately 40% of outstanding shares, Einhorn noted. Despite announcing this plan towards the end of last year, the market seems to have ignored this fact, he added.
Life insurance can be a complicated business to understand, so Brighthouse Financial might not be for everyone. But there seem to be plenty of other undervalued opportunities in the portfolio. Take Consol Coal Resources (CCR, Financial), for example. Einhorn and team estimate this stock is trading on a forward price-earnings ratio of 6.9 and offers shareholders a 12.5% dividend yield.
While sentiment towards the coal business has been deteriorating for many years, Consol's low cash operating costs and strong cash generation are attractive qualities. Greenlight believes there is substantial upside to current growth estimates over the next few years.
The last company I'm going to profile in this article is Green Brick Partners (GRBK, Financial). This diversified home building and land development company is another excitingly cheap stock. It is trading at just 85% of book value.
Einhorn thinks the management is "disciplined and resourceful," as evidenced by the fact that despite many analysts expecting the housing market to slow in 2019, the company is forecasting moderate earnings growth. David Einhorn (Trades, Portfolio) is on the board of the business, so we can assume management is aligned with shareholders in this situation.
Disclosure: The author owns no share mentioned.
