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Rupert Hargreaves
Rupert Hargreaves
Articles (941)  | Author's Website |

David Einhorn Roars Back With Value Bets

By sticking with his value strategy, Einhorn has made a strong recovery

May 23, 2019 | About:

As anyone who follows my articles will know, I have been following the performance of David Einhorn (Trades, Portfolio)'s Greenlight Capital closely over the past two years.

I've been particularly interested in Einhorn's performance because he has carved out a reputation for himself as being one of the best value investors around. But, in recent years, his performance has deteriorated.

Indeed, last year, Greenlight posted its worst-ever performance, losing a total of 34% for investors. That's the worst performance since 1996, a timeframe that includes both the financial crisis and the bursting of the dot-com bubble.

I've been interested to see how this seasoned value investor copes with this loss, and what actions he has decided to take following his worst year on record.

Making a recovery

Greenlight's performance picked up with equity markets during the first quarter of this year. The Greenlight Capital funds returned 11% during the January to March period, making back all of the losses from the fourth quarter of 2018. According to reports, the strong performance continued on into April. At the end of April, Greenlight was up 19% for the year according to reports. That's an impressive comeback for this value investor.

Einhorn lost a significant amount of money last year on his Tesla (NASDAQ:TSLA) short, and this year, as shares in the company have continued to plunge, this position has turned profitable. But I'm not really interested in Einhorn's shorts. I'm more interested in his positioning on the long side, particularly his value-focused investments in companies like Brighthouse Financial (NASDAQ:BHF) and Green Brick Partners (NASDAQ:GRBK).

Both of these are fantastic examples of why it is so important to ignore price action and concentrate on the fundamentals when value investing.

Sticking with the thesis

Brighthouse was one of Greenlight's worst-performing positions last year, but the stock rallied significantly during the first quarter of 2019.

Brighthouse is a complicated business to understand. It provides life insurance policies, the accounting for which is particularly fiendish. The company purchases hedges to mitigate its exposure to equity markets and interest rate risks, which have to be marked to market every quarter.

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As Einhorn explained in his first-quarter letter to investors, as the company invests insurance premiums received, it profits from rising equity markets and interest rates. "All else being equal, BHF benefits from rising equity markets and higher interest rates, as the economic gain from lower expected claims more than offsets the company's losses on its hedges," he wrote. However, due to the way hedges are treated under GAAP accounting, "while the hedges generate mark-to-market losses, there is not a corresponding reduction in GAAP liabilities."

Einhorn believes that this volatility is putting off investors, but he's willing to look through the noise and concentrate on the underlying business. The fact remains that the company intends to repurchase around a third of its outstanding market capitalization by 2021.

With the stock trading for less than a third of book value, this seems to be a desirable use of capital, and Einhorn believes that it is worth waiting for this opportunity to play out. And it seems his patience is already paying off. At the beginning of May, the stock was up 40% for the year.

Bright outlook

After a rough end to 2018, Green Brick is also charging back this year. The stock is up 25% year-to-date.

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It is easy to see why investors are returning to the company. At the beginning of the month, the company reported a 13.6% year-on-year increase in earnings for the first quarter of the year with a 33.3% increase in the number of residential units completed by the business and a 54% increase in the number of homes under construction.

The dollar value of backlog units as of March 31, 2019, was $307.5 million, an increase of 35.8% year-on-year, implying that the company is on track to see a substantial increase in earnings over the next 12 to 24 months as it ramps up production.

Disclosure: The author owns no share mentioned.

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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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Comments

Thomas Macpherson
Thomas Macpherson premium member - 4 months ago

Hi Rupert. I usually don't comment on these type of articles. As an investent manager myself, I know how hard it is to beat your respective market index. But what I find frustrating is individuals who generally who had one good pick (Allied Capital in David's case), play a good poker or bridge game, but over the short AND long haul have a terrible record. In David's case - according to GF - he has underperformed the S&P500 on a 3, 5,10, and 15 year basis. He hasn't gottten crushed 8 out of the 10 past years. He's underformed the index by -8.79% to 8.62% (3 Year), -8.03% to 8.04% (5 Year), 2.35% to 12.84% (10 Year), and 3.37% to 7.58% (15 Year). Charging the fees he does, I'm glad to see that many investors have deserted this type of performance (dropping from roughly $7B in AUM in 2017 to roughly $1B in 2019. Think of the money he's made over the past 15 years with such a record. In my humble opinion, we need to start weeding out some "value gurus" who have absolutely stunningly poor returns. We owe it to investors. Best - Tom BTW - Nothing against your writing Rupert. I really enjoy your work. I just feel strongly that some value gurus have coasted on a good year or two in 25. You won't many customers' yachts with their investors.

Rupert Hargreaves
Rupert Hargreaves - 4 months ago    Report SPAM

Hi Tom,

I must disagree with you on this. Einhorn hasn't just had one or two good ideas during his long career. Yes, he has come unstuck during the past few years, but between inception (1996) and 2016, he returned 16.5% annualized. Between 2005 and 2011 he returned 108% for investors net, a period when the S&P 500 went nowhere. His historic track record speaks for itself but has struggled recently like so many other value investors (even Buffett).

I think we should pay attention to all investors, and understand how they got where they are, what mistakes and right moves they've made. Disregarding them just because of a few years of underperformance without looking back as to why they've got that record and what happened before is all part of the learning process.

Best,

Rupert

Thomas Macpherson
Thomas Macpherson premium member - 4 months ago

Hi Rupert. Those are all great points. As I said before I hope I didn't offend when I wrote that. It may be we are using different data (see below) but even taking out 2017 and 2018 his underperformance over 10 years is a little shocking. I don't use measures like 2006 - 2011 simply because most lock ups don't allow investors to invest that way. I once tried using almost the exact same years as a measure of my performance (David and I had almost the exact performance in 2008) and I was hammered by my board and investors that I was cherry picking the data (which - sadly - I was!). I also noticed some errors in GFs calculation. For instance, according the data David underperformed in 2005 not overperformed. Perhaps we are using different data sets? In any case, it's a free market and I can choose not to invest in David's business.

I unhesitatingly agree with your last paragragh. I spend 8-10 hours a day reading about companies or investors and find I learn something new every day. I've definitely learned a lot from watching David - from his early days to his battle with Allied Capital to the last few years. Thanks again for posting this (and your thoughtful reply) and thanks for pointing out holes in my thesis. I realize I need to go back and spend far more time reading about David's performance. My best wishes - Tom

Rupert Hargreaves
Rupert Hargreaves - 4 months ago    Report SPAM
Tom,

Thanks for the comment. I took no offense at all, sorry if it seemed like that.

One thing I have noticed recently is that most people are quick to attack fund managers like Einhorn and others for making mistakes. I think this is unwise because I always have Charlie Munger (Trades, Portfolio)'s advice in my head "invert, always invert." I think it is always best to take a balanced approach to all outcomes and try and figure out what went wrong so that we don't replicate those mistakes. This is as true with Einhorn as with any other investor. Writing him off just because he had one or two bad years is, in my opinion, not sensible. He has made some great investments over the years and that's always worth taking into account.

Hope that all makes sense. It's just how I view the world in my constant quest to become a better investor.

Best,

Rupert

stephenbaker
Stephenbaker - 4 months ago    Report SPAM

From my perspective, Einhorn is noted mostly for his short positions. The author chooses not to address his short positions but his underperformance is due, at least in significant part, to his short positions. Maybe someone here can cite a professional investor who outperforms using short positions; I know of none but would be interested to know if any such investor exists and has a proven track record. Otherwise, it seems clear why Einhorn cannot maintain a record of outperformance.

valuefan
Valuefan premium member - 4 months ago

A great way to invest with Einhorn is GLRE, which trades at approximately a 25%

discount to book value.

Thomas Macpherson
Thomas Macpherson premium member - 4 months ago
Hey Stephen. That's a great point and a question of which I have no answer. I don't short at Nintai Investments simply because the risk reward has always made me nervous. It would be interesting to see if we could create a screen on GF where could link shorts to a guru though I have no idea how to mke that happen. Thanks for a great point and great question. BTW - I think to Rupert's point, it would be a great question about how much David has made long and how much on shorts and what we can learn from that. I know the truly horrendous losses over the past few years have been where the markets have zigged while David zagged. If i remember correctly, a lot of those losses have been shorts much like Bill Ackman (Trades, Portfolio). Thanks again for your comment. Best - Tom

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