David Einhorn Rebounds – Somewhat
After suffering the worst year in his fund’s history, David Einhorn (Trades, Portfolio) has started 2016 on a better foot as some of his earlier ideas began to prove correct.
Einhorn’s Greenlight Capital fell 20.2% in 2015 as Einhorn shorted the top two performing stocks in the S&P 500, Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN), and was long two of its 10 worst performing stocks, among other missteps. Greenlight also lost money in each quarter of the year, in which the S&P 500 returned 1.4% including reinvested dividends.
“We know that in each prior period when the environment was challenging for our style, things eventually turned and we did well,” Einhorn said in his fourth quarter letter. “We don’t know when the winds will change, but we know that they will.”
Einhorn consoled investors with four instances of temporary snags leading to significant outperformance for his firm, the most recent being in 2008. That year, Greenlight declined 17.6% before swinging back to a 32.1% return in 2009.
Though there’s no way to tell yet whether a good month will represent the start of a bounce back for Einhorn, in January he had a positive return of 1.2% net of fees.
Helping Einhorn’s January return was the decline of two sizable shorts, Amazon and Netflix. After soaring in 2015, the two tech stocks Einhorn called overvalued have plunged by 28% and 25%, respectively, to date.
Amid the broader market sell-off, Amazon’s shares tumbled after its fourth quarter earnings, released Jan. 28, rose 122% year over year but fell far short of expectations of analysts polled by Thomson Reuters. Netflix shares, on the other hand, fell in spite of expectation-beating earnings, and revenue and subscriber growth.
Most of Einhorn’s largest positions at the end of the fourth quarter declined with the 10.4% drop of the broader market, such as Apple (NASDAQ:AAPL), Consol Energy (NYSE:CNX) and General Motors (GM). But his fourth largest position, gold, has surged 11.3% as investors worry about the plunge in oil and weakness in China’s economy.
While two of the new positions he established in the fourth quarter, Mylan (NASDAQ:MYL) and E.ON (FRA:EOAN), declined, the third, Macy’s (NYSE:M), has had a positive start to the year. Macy’s shares jumped almost 11%.
“While it’s unlikely that management will reverse course on its own, it wouldn’t surprise us if a private equity firm teamed up with a REIT to buy the company and unlock the value [of Macy’s real estate] privately,” Einhorn said in his fourth quarter letter.
“Even if this doesn’t happen, the shares are cheap at 5x EBITDA, 7x equity free cash flow, and less than 9x 2015 EPS, with a healthy balance sheet and strong history of share repurchases. We think a portion of the recent sales weakness was driven by unseasonably warm weather and a strong dollar impacting tourist business, which should set up for favorable comparisons in 2016.”
Since Greenlight’s inception in 1996, the fund has had an average annual return of 16.5%.