Einhorn’s Greenlight Made A Record 25% In Q4, Mocks Tesla’s “Valuation-Indifferent” Investors: Full Letter
Ending a period of dismal performance which sent his AUM tumbling in recent years, today David Einhorn sent out a letter to investors in which he was delighted to announced that in Q4, his hedge fund returned 25%: “this was the best quarterly result in Greenlight’s history. Longs contributed 42% while shorts detracted 15% and macro detracted 1%.” The reason for the surge: the dramatic outperformance of value stocks: “after nine months in which growth stocks relentlessly outperformed value stocks, the fourth quarter had a moderate reversal. For the year, however, the Russell 1000 Pure Growth index returned 67% while the Russell 1000 Pure Value index was essentially flat.” The record Q4 performance was enough to push Greenlight to green for the year, with a 5.2% return for the entire 2020.
As Einhorn explains, in Q4 “nearly the entire long book performed exceptionally well. The leader was Green Brick Partners (GRBK), which surged from $16.10 to $22.96 per share as strong results caused a significant upward revision to the forecasted earnings trajectory of the company. Brighthouse Financial (BHF) recovered part of its earlier decline, advancing from $26.91 to $36.21 as the yield curve steepened and value stocks did better. AerCap Holdings (AER) bounced from $25.19 to $45.58 following enthusiasm that the COVID-19 vaccines will lead to a recovery in air travel.”
The poker affiicionado also revealed that new positions established earlier in the year (he did not initiate or close out any significant positions during the quarter), Resideo Technologies (REZI), NCR Corporation (NCR), Change Healthcare (CHNG) and inflation swaps, “were also significant contributors” to the outperformance (more in the full letter below).
Einhorn then spends a few paragraphs laying out his investment case in two formerly private companies, FuboTV and Danimer…
We occasionally invest in private companies. We don’t often discuss them because the investments are small and infrequent; we generally consider them only when it’s something very promising coming to us from an established relationship. This quarter two of our private investments went public and led to significant gains.
FuboTV (FUBO) is a streaming service that offers a sports-focused “skinny” bundle of TV channels that also includes a variety of news and entertainment content. Essentially, this is the type of package that Apple unsuccessfully tried to assemble for years…
* * *
After being introduced to Danimer Scientific (DNMR) in 2014, we invested privately a year ago. DNMR makes Nodax, a biodegradable plastic. Plastics are a global environmental problem, and nobody likes using paper straws. Enter Nodax, which is made by feeding vegetable oil to bacteria and then transforming the fat bacteria into a type of plastic that will decompose even in salt water.
… before introducing investors to another already-public investment, NeuBase Therapeutics which Greenlight invested in several years ago at an average price of $3.96:
The combination of the frothy environment for companies with large addressable markets and NBSE’s own pre-clinical progress leaves us surprised that NBSE hasn’t yet joined the “story stock” party. NBSE is a “platform” company with a technology called PATrOL, which develops highly targeted therapies that increase, decrease or change the protein function of genes.
Like DNMR, the addressable market is immense. While there is a long path from here to products on the market, NBSE’s current market capitalization of less than $200 million prices in little chance of success. We think the risk-reward is asymmetrical. NBSE ended the year at $6.99.
The remaining bulk of the letter is spent on Einhorn’s nemesis, Tesla, which he famously accused of being a fraud in several previous letters.
He starts off by lamenting the underperformance of the fund’s shorts focused mostly in high-flying tech stocks. As a reminder in October, Einhorn predicted that the tech bubble popped on Sept 2, 2020… an observation which has proven incorrect, as Einhorn explains:
The short portfolio had a difficult quarter and continued to generate losses in a rising market. Last quarter we postulated that the technology bubble had popped and that September 2, 2020 might have been the top of this cycle. We should clarify what we meant, as our language was imprecise. We don’t believe that all technology stocks are in a bubble; we believe that a growing number of “story stocks” that have become disconnected from valuation are in a bubble. Nonetheless, the theory that it has popped has proven to be incorrect. The bubble is alive and well, and we covered the bubble basket we had put in place with a moderate loss.
As one would expect, Einhorn saves the best for last, in this case his latest thoughts on Tesla which we present below without commentary (highlights our):
We also managed to sidestep most of the significant second-half rally in Tesla (TSLA), as we adjusted our position ahead of its inclusion in the S&P 500 index. Even so, TSLA was our largest loser in 2020, with most of the losses coming in the first half of the year.
TSLA cars are not a fad; if they were, TSLA would sell many more than it does. The fad is in owning TSLA stock. We have quipped before that twice a silly stock price is not twice as silly, it’s still just silly. But what about 20 times a silly price? In the 2000 internet bubble, Cisco Systems peaked out at 29 times revenue, which would be a discount to where TSLA now trades.
This begs the question as to why a stock might trade at 20 times a silly price. Of course, there is the possibility that we are just wrong and bad at measuring silliness. But setting that aside, we think that the answer is that certain stocks [ZH: i.e., TSLA] are held exclusively by valuation-indifferent investors. In our early training, one of the first concepts we learned is market capitalization, or the share price times the number of shares outstanding. This is what a company is worth in the market today. Valuation analysis means comparing the market capitalization to various indications of value. It might be a comparison to current and future revenues, earnings, cash flows, asset values, etc.
When we speak of valuation-indifferent investors, we mean investors for whom valuation is not part of the process. They either will not, cannot, or choose not to consider valuation as a factor.
Will not: Index funds are the most obvious valuation-indifferent investors. In fact, to the extent a stock is overvalued, index funds are required to buy even more of it. Passive investing has become so prevalent that passive index investors are no longer price-takers, buying at the prevailing price set by active investors engaging in a vigorous effort to determine the correct value, but rather price-makers. Their demand sets the price. From our perspective, price-making rather than price-taking calls into question the entire premise of passive investing.
Cannot: A second group of valuation-indifferent investors are the new masses of retail investors, who simply have no training or competency in valuation. Historically, their influence has been limited by stock-brokers or financial advisors who determine suitability and provide advice. Today, no advice or suitability is needed. Download an app and start trading, commission free. Log onto the app and it will give you a “free” share in a highly speculative stock to get you going. Many in this group think an “expensive” stock is one that trades at $100 a share and a “cheap” stock is one that trades at $5 a share.
Choose not to: A third group of valuation-indifferent investors are professional investors who have decided that valuation is not part of the process. As Howard Marks described in his recent memo “Something of Value,” the attitude is to “hold on as long as the thesis is right and the trend is upward.” This investor group thinks it’s unproductive to consider if the market capitalization exceeds even the best case estimates of the present value of future earnings by an order of magnitude. This goes far beyond buying growth at a reasonable price or even growth at any price. It takes the traditional advice of letting your winners run to its logical extreme.
When the last holder of a stock that has valuation as part of the process exits and the shares are held more or less exclusively by members of those groups, the stock becomes disconnected from fair value. Valuation becomes irrelevant and the stock price itself may as well be a random number. The only point in observing that various money-losing companies, without any proprietary advantage, are trading at valuations that imply they will someday become industry leaders, is to marvel at just how speculative the bubble in disconnected stocks has become.
In addition to Tesla’s “valuation-indifferent” investors, Einhorn also lashed out at the sellside “analysts” who have enabled this euphoria (in addition to the Fed of course):
Yes, Wall Street analysts will provide research that purports to support inflated valuations and give “price targets.” The key is to understand that price targets follow stocks, rather than lead them. A higher stock price generates higher price targets and a lower stock price generates falling price targets. Wall Street analysts didn’t blow the whistle on the internet bubble, and they won’t do any different this time around.
Einhorn concludes by giving himself a modest pat on the back:
While 2020 represented a historic underperformance of value, the fourth quarter demonstrated that when the headwinds abate, we can achieve attractive results. As we enter the new year, our net long exposure of 64% is higher than it has been in some time. We are positioned for higher inflation, a strong housing market and rising interest rates. If things generally go this way, value stocks should continue their recent outperformance. We are excited to turn the page into 2021.
Hopefully Greenlight’s investors share the same excitement.
The full letter is below:
Thu, 01/21/2021 – 15:52