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Margaret Moran
Margaret Moran
Articles (117) 

Greenlight Capital's 3rd-Quarter Update

Hedge fund invests in biotech and insurance, exits timeshare and achieves short gains

David Einhorn (Trades, Portfolio)’s Greenlight Capital recently released its portfolio updates for the third quarter of fiscal 2019. During the quarter, the hedge fund established a new position in NeuBase Therapeutics Inc. (NASDAQ:NBSE) and sold out of Hilton Grand Vacations Inc. (NYSE:HGV), KAR Auction Services Inc. (KAR), Valaris PLC (VAL) and Cars.com Inc. (CARS). It made additions to its positions in Brighthouse Financial Inc. (NASDAQ:BHF), The Chemours Co. (CC), General Motors Co. (GM) and Adient PLC (ADNT) while reducing its holding of Dillard's Inc. (DDS). The hedge fund profited on its Netflix Inc. (NASDAQ:NFLX) short, but exited its Caterpillar Inc. (NYSE:CAT) short at a loss.

The New York-based hedge fund was founded by Einhorn in 1996. It invests primarily in corporate debt offerings and both long and short positions in stocks. In its early days, the hedge fund made its most significant profits from short selling weak companies such as Lehman Brothers and Conseco, leading to a loss of 23% during the 2008 recession when the Securities and Exchange Commission temporarily banned the shorting of financial stocks. Results have fared better since then, and the fund returned 5.6% for the recent quarter ended Oct. 30 and 20.6% year to date.

As of the quarter’s end, the Greenlight Capital equity portfolio holds positions in 19 stocks and is valued at $1.39 billion. The top positions are Green Brick Partners Inc. (GRBK) at 18.57%, General Motors at 16.6% and AerCap Holdings NV (AER) at 13.72%. In terms of sector weighting, the fund is most heavily invested in consumer cyclicals at 45.54%, followed by industrials at 13.72% and financial services at 11.65%.

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NeuBase Therapeutics

Greenlight Capital established a new stake of 1,538,462 shares in NewBase Therapeutics, impacting the portfolio by 0.55%. During the quarter, shares traded at an average price of $4.91 apiece.

NeuBase Therapeutics is a small biotech with a market cap of $114.38 million as of Dec. 6. It was formed on July 12 from the reverse merger of NeuBase, a small biotech startup, and New York-based Ohr Pharmaceuticals, a publicly traded development-stage biotech. Neubase’s research focuses on gene silencing therapies to cure rare genetic diseases, while Ohr develops products to treat cancer cachexia and macular degeneration. The chart below shows the revenue and net income for Ohr since its original stock listing.

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Greenlight Capital’s purchase of the merged company’s shares was announced following the deal’s closure, and NeuBase Therapeutics began trading on the Nasdaq under the NBSE symbol. Prior to the reverse merger, NeuBase agreed to the private placement of 9% of its common stock with Greenlight Capital, making the hedge fund its largest institutional shareholder.

According to NeuBase CEO Dietrich Stephan, Ph.D., the company’s PATrOL platorm “has the potential to address a wide range of germline and somatic diseases caused by inappropriate expression and change-of-function mutations of genes.” Both Stephan and Ohr CEO Jason Slakter, Ph.D. have stated they believe the reverse merger to be the best way to maximize value for their shareholders.

In connection with the merger, NeuBase entered into financing agreements resulting in gross proceeds of $9 million to fund operations. Though neither of the development-stage biotechs were able to turn much profit in the past, both they and Greenlight Capital are taking a stance on entering a revenue generation phase in the upcoming years. The company’s Janus Base technology won recognition on Dec. 2 as one of The Scientist’s top 10 innovations, providing further optimism that the biotech will soon produce profitable treatments.

Hilton Grand Vacations

Greenlight Capital sold out of its 868,100-share position in Hilton Grand Vacations, impacting the portfolio by -2.04%. Shares traded at an average price of $31.50 during the quarter.

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Hilton Grand Vacations is the Orlando, Florida-based timeshare spinoff from Hilton Worldwide Holdings Inc. (NYSE:HLT). It owns over 8,000 franchised rooms in 51 properties throughout the United States.

According to Insider Monkey, 37 hedge funds were bullish on the stock at the end of the first quarter of the year, an increase of 32% from the fourth quarter of 2018. The number increased to 42 at the end of the third quarter. This optimism comes in light of first-quarter revenue of $642 million (a record for the company) and expectations of strong year-end results.

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GuruFocus has granted Hilton Grand Vacations a financial strength score of 4 out of 10 and a profitability score of 7 out of 10. The company has a price-earnings ratio of 12.31, an operating margin of 19.88% and a cash-debt ratio of 0.07. According to GuruFocus’ calculations, Greenlight Capital achieved a gain of approximately 7.62% on the investment due to the appreciation of share price.

Brighthouse Financial

The hedge fund added 281,281 shares to its stake in Brighthouse Financial, impacting the portfolio by 0.82%. Shares traded at an average price of $37.20 during the quarter.

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Brighthouse Financial is one of the largest live insurance providers in the U.S., with approximately 2.6 million insurance policies and annuity contracts in force and a market cap of $4.34 billion as of Dec. 6. According to the Peter Lynch chart below, the company is currently trading at a price that is far below its fair value.

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Despite negative market sentiment, Brighthouse shares advanced from $36.69 to $40.47 during the quarter, making it a solid winner for Greenlight. Einhorn discussed his thoughts on the undervaluation in his third-quarter investor letter:

“When the company reported its second quarter, not only was there no $1 billion loss, BHF actually grew its capital buffer by $400 million. In the early part of the year and again in June, management added to its interest rate hedges and purchased cheap options that protected the balance sheet through the subsequent interest rate declines. Usually, when an advertised bear case doesn’t come to fruition, the stock tends to soar. Relative to BHF’s $4 billion market cap, the $400 million capital build when the market had expected a large loss ought to have had a large positive impact on the share price. In this case, the market yawned. The glass half-empty crowd concluded that if the hedges generated gains in a falling rate environment, those gains would probably be reversed if rates went back up.”

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Brighthouse has a GuruFocus financial strength score of 3.8 out of 10 and a profitability score of 1.3 out of 10. It has a price-earnings ratio of 2.59 and a cash-debt ratio of 0.98. According to GuruFocus’ calculations, Greenlight has made a total estimated loss of 33.33% on the investment so far due to share price depreciation, though this can turn into a profit if the share price corrects to estimates of its intrinsic value according to its earnings.

Shorts update

As Netflix failed to achieve its subscriber growth targets, the stock fell from $367.32 to $267.62 during the quarter. This is good news for Greenlight Capital’s put options on the entertainment subscription company. In his third-quarter letter to investors, Einhorn noted the following change in wording in Netflix’s most recent 10-Q filing, which he sees as further evidence that the company is losing its ability to create value for shareholders: “We expect that from time to time the prices of our membership plans in each country may increase change.”

The hedge fund exited its long-held Caterpillar short at a loss, since the construction company managed to improve its long-term cost structure. Einhorn thus expects higher peak and trough earnings for the company going forward.

Disclosure: Author owns no shares in any of the stocks mentioned.

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