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Rupert Hargreaves
Rupert Hargreaves
Articles (947)  | Author's Website |

David Einhorn's General Motors Story Shows the Benefits of Buying With a Margin of Safety

Some thoughts on Einhorn's General Motors trade

August 28, 2019 | About:

David Einhorn (Trades, Portfolio)'s favorite stock for the past five years has been General Motors Co. (NYSE:GM).

The value investor's hedge fund, Greenlight Capital, has owned the stock since the first quarter of 2011 and, at one point, had as much as 32% of its portfolio invested in this one position.

Steady buying

As noted above, Einhorn first acquired General Motors during the first quarter of 2011. He bought 3.4 million shares of the automaker at an average price of $31, devoting 2.2% of his portfolio to the company in the beginning.

By the end of the year, Einhorn had upped his stake to 19 million shares, making it an 8% portfolio weight. While it is impossible to tell what price the guru was paying for the stock, shares of the business hit a low of around $20 in September and December 2011.

It looks as if the value investor was taking advantage of these declines to substantially increase his position in the company.

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Greenlight continued to add to its holdings during the first three months of 2012. According to 13-Fs filed with the Securities and Exchange Commission, by the end of September 2012, the hedge fund owned around 21.6 million shares, making up 10.4% of the overall portfolio.

The stock traded below $25 per share for the majority of 2012, only breaking above this level in October. At this point, according to historical 13-F data, Einhorn stopped buying.

Reducing the position

As General Motors' stock rose, Einhorn started selling. He dumped his entire position in the fourth quarter of 2013, when the stock was trading between $37 per share and $41 per share.

It is impossible to tell what the exact profit was on this trade, but at its height, General Motors made up 10% of Greenlight's equity portfolio. For the full year, the firm returned 19.1% net of all fees and expenses, one of its best years on record.

Buying back in

After a year away, Einhorn returned to General Motors in the first quarter of 2015. The stock hadn't declined substantially (it was trading around $37), but Einhorn believed the company was on the verge of a big turnaround. Here's what he wrote in his first-quarter 2015 letter to investors:

"We decided to take another drive in General Motors (NYSE:GM) and repurchased a fresh stake at $34.62 per share. We had held GM for about three years before selling it in early 2014, when we were disappointed with management's earnings guidance. 2015 should be a better year for GM: the company is a year closer to eliminating its losses in Europe; low gas prices should stimulate demand for its highly profitable SUV and light truck product lines; raw material costs are low; and we believe that the worst of the product recalls is behind them. Finally, GM has acknowledged it might not need quite so much cash lying around earning zero interest, and it will begin to buy back shares shortly. While GM also trades at less than 8x 2015 consensus estimates of $4.63 per share, we believe there is an excellent chance that GM can beat those expectations."

Clearly, Einhorn believed the market continued to undervalue the business until the first quarter of 2017. During the quarter, he increased the position to just under 55 million shares, when the stock was trading around $36.

The value investor decided to make public his opinion that the business should increase shareholder returns, a view management disputed. For his part, Einhorn remained confident that the business would do the right thing. As he wrote in his first-quarter 2017 letter:

"We know this is a tough fight. Fortunately, the math is on our side (if GM does what we suggest, we believe the stock will go up a lot) and the ultimate decision will be made by our fellow shareholders. We believe others recognize that the stock is deeply undervalued and when shareholders grasp the math and the extent of GM's behavior, they will vote with their wallets and for needed change at the Board level."

Unfortunately, it seems as if he has given up on this idea. Over the past two years, Greenlight has been reducing its position in the automaker. It now owns just under 6 million shares. The good news is most of the sales seem to have been done at or above the price acquired at the beginning of 2017 (that's excluding dividend income).

The saga continues

Greenlight's General Motors saga does not appear to be over, and I shall be watching with interest how the firm treats the remainder of its position over the next several quarters.

It seems that while the company has not adopted Einhorn's cash returns proposal, he'll still come out on top from the trade overall -- that's the benefit of buying a high-quality business at a deep discount to intrinsic value.

Disclosure: The author owns no stocks mentioned.

Read more here: 

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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.

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