David Einhorn (Trades, Portfolio)'s Greenlight Capital returned 5.8% in the second quarter. The year-to-date return is at 17.4%. Every bucket, long, short and macro, generated a positive return. The big winners for the fund were short position Tesla (TSLA, Financial), the SPDR Gold Trust (GLD, Financial), Adient (ADNT, Financial), General Motors (GM, Financial) and Aercap (AER, Financial). Losses in CNX Resources (CNX, Financial) and Ensco (ESV, Financial) worked against the partnership.
Einhorn has a new short in what he describes as today's equivalent of the 90's Pets.com, Chewy Inc. (CHWY):
"Over its life, Pets.com chewed through just over $200 million of investor capital. CHWY has burned $1.6 billion and counting. Analyst consensus is that CHWY will achieve modest operating profits in 2023. Its market value is nearly $14 billion - more than 30x Pets.com at its peak."
Einhorn also dived into a financial he's been holding for quite some time; Brighthouse Financial (BHF, Financial). He started off his discussion by calling out Goldman Sachs (GS, Financial) and Credit Suisse (CS, Financial) both publishing negative reports with key flaws. According to Einhorn, they treat Brighthouse's annuity portfolio business as if it is in run-off instead of a going concern. Second, they overestimate the company's sensitivity to a drop in interest rates. But most importantly, he believes they fail to account for the way cash flows are thrown off over the life cycle of an annuity book. Perversely, they are awarding Brighthouse a lower multiple when it should receive a higher multiple.
Einhorn can easily see free cash flow doubling over the next several years, which would be impressive, implying a forward free cash flow multiple of about 4.5. But even before reaching that target, Brighthouse is planning to buy back $1.5 billion in stock according to Einhorn. He likens it to 1% of shares per month until 2021, which almost bakes in a base rate of return of at least 12% without the growth he expects.
An insurer Einhorn doesn't like is Assured Guaranty (AGO) and he speculates regulators are limiting its capability to do buybacks. He also believes Assured Guaranty will need to take a large charge on its book of defaulted Puerto Rican debt.
Another interesting new position is Chemours (CC). Einhorn previously invested in Chemours and apparently rode it from $3.12 to $57.23. His first rodeo was based on the market pricing in $5 billion in liabilities that ultimately turned out to be much lower. This time around, the market is again penalizing Chemours for a potential environmental liability running in the billions of dollars. Einhorn believes neither Chemours nor its former parent ever made perfluorooctanesulfonic acid. Einhorn's Greenlight thinks the ultimate liability will be tens of millions of dollars instead of billions, which I guess is good news for some other company. He's been accumulating shares at an average price of $23.18. Currently, it trades below $20.
The final significant position I think is worth bringing to your attention is Einhorn's new macro short position in U.S. corporate credit. He's betting against both investment-grade and high-yield debt. This is not a unique hedge fund trade as many managers view the credit spreads as historically tight (as does Einhorn). This means they yield a little more than sovereign bonds. Einhorn also makes the point that rating agencies are complacent in allowing high debt-Ebitda ratios without reducing their ratings. I think rating agencies justify this reasoning that the companies in question are addressing the issue and, therefore, it is premature to downgrade them. Bond King Jeffrey Gundlach has also called out this problem and noted that if rating agencies applied rating judiciously a significant part of the investment-grade universe would actually enter junk territory. That would be problematic because there are not as many buyers and holders of junk bonds.
You can read Einhorn's entire letter here.
Disclosure: Author is long Chemours, Gold and short Tesla.
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