David Einhorn, the president and founder of Greenlight Capital, recently issued his latest quarterly letter to investors. As normal, the hedge fund superstar manages to eloquently describe his macroeconomic view and investment ideas in just a few short pages.
He begins the letter by identifying the significant obstacles the financial markets faced in the third quarter. These include: slowing economics in Europe, Asia and United States, higher oil prices and agricultural shocks due to America’s worst drought in decades. In regards to corporate earnings, he explains that “earnings growth disappeared, as many companies missed revenue and earnings estimates and lowered guidance.” A trend that is becoming more evident by the day in the current earnings season.
Despite the global headwinds, Einhorn still sees plenty of opportunity in the market. The Greenlight Capital funds returned 9.4 percent, net of fees and expenses, in the third quarter, beating the S&P 500’s 6.4 percent return in the same period. He contributes material performance in positions such as gold, Apple (NASDAQ:AAPL), Arkema (NYSE:AKE), Seagate Technology (NASDAQ:STX), Sprint (NYSE:S) and one undisclosed short for the quarterly gains. Einhorn explains, “Overall, the longs contributed all the quarterly gains, while the short portfolio lost less than 1 percent.”
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Einhorn reiterated his view on Green Mountain Coffee Roasters (NASDAQ:GMCR), General Motors (NYSE:GM), Cigna (NYSE:CI) and Chipotle Mexican Grill (NYSE:CMG). All of which he discussed at the recent Value Investing Congress.
In regards to Green Mountain, he writes, “It is implausible that GMCR audit committee conducted a serious investigation of our allegations in a mere 23 days after last year’s Value Investing Congress.” He also notes a risk in Starbucks (NASDAQ:SBUX) renegotiating or walking away from its partnership with GMCR. In short, Einhorn describes GMCR as a company that “does not control any important brands.”
Although shares of General Motors declined 45 percent last year, Einhorn is bullish on the bailed-out automaker. He writes, “In expanding on our GM thesis, we argued that the company has not been given credit for its improved competitive and financial position post-bankruptcy. At $24.75 per share, GM trades at 8x this year’s earnings of about $3 per share. GM is poised to benefit from continued recovery in the U.S. market, a significant product upgrade cycle, eventual restructuring in Europe, and continued growth in China and Brazil. We view the government stake as an opportunity, rather than an overhang.”
Cigna is a health care play by Einhorn that “trades at a discount to the HMOs” and has less risk to Obamacare. “CI has much less exposure to the known risks of Obamacare including health care exchanges. In fact, Obamacare may provide a growth opportunity for the company because it may finally afford CI the opportunity to compete meaningfully in the individual segment of the market.”
At the end of the third quarter, the largest disclosed long positions in Greenlight Capital funds were Apple, Cigna, General Motors, gold and Seagate Technology. The funds had an average exposure of 97 percent long and 69 percent short.
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Here’s the Greenlight Capital letter for your reading pleasure: