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David Einhorn Gets His Mojo Back

- By John Engle

It is no secret that David Einhorn (Trades, Portfolio)'s hedge fund Greenlight Capital has struggled in recent years. 2018 saw Greenlight post its worst performance in its 22-year history with a staggering 34% loss.


In January, we opined that Einhorn and other hedge fund gurus might face another hard year in 2019. For Einhorn, at least, this has not been the case. Indeed, the battered champion of value investing has had a phenomenal start this year. But can the recently returned good times keep on rolling?

Into the fire

Greenlight had had a painful year in 2018 already, before December came around. Adding insult to injury, Einhorn's fund lost 9% in the final month of the year. All three of his largest positions suffered substantial losses, with Brighthouse Financial (BHF) down 48%, Green Brick Partners (GRBK) 36% and General Motors (GM) 18%.

Unsurprisingly, many of Einhorn's investors decided to jump ship in the wake of last year's fairly catastrophic performance. Thus, while Greenlight technically lost 34% last year, the fund has actually shrunk about 60% since January 2018. Greenlight now has just $2.5 billion under management, a far cry from the $12 billion it boasted at its zenith.

Out of the ashes

In the wake of last year's disaster, Einhorn faced a challenging task: reinventing Greenlight. Such efforts have often led to tears, which may have contributed to some commentators' claims that Einhorn faced a hedge fund midlife crisis.

Heading into 2019, Einhorn had a lot to prove, both as a fund manager and as a value investor. Somewhat amazingly, he appears to have succeeded. Greenlight has posted an impressive 17% gain in 2019 through May, compared to the approximately 11% rise in the S&P 500 Index. The universe of hedge funds as a whole has not managed to replicate Einhorn's turnaround, posting less than 3% in gains through May.

Phoenix rises

Greenlight's turnaround has come about thanks to a few evident factors. Impressive upward runs by some of its biggest positions, combined with the long-awaited positive return to its leading short position. Einhorn has highlighted GM's strong performance as one of the major factors that has boosted Greenlight year-to-date, as well as well-timed short positions against momentum-driven tech stocks including Amazon.com Inc. (AMZN) and Netflix Inc. (NFLX).

A broader strategic pivot appears also to have contributed to Greenlight's tentative turnaround story. Einhorn has narrowed his focus to a smaller number of key positions, effectively doubling down on his long-standing commitment to value investing principles. Einhorn decided to concentrate Greenlight's holdings and bet on high-conviction plays.

Flame-out warning

After starting off the year with four excellent months, Greenlight hit choppier waters in May. Several of Einhorn's big positions reversed course in the wake of increasing trade war tensions between the U.S. and China. GM, for example, declined about 14% during the month due to renewed tariff fears. Likewise, other key positions, such as Brighthouse Financial and Green Brick Partners, also fell in May. However, despite these reversals, Greenlight managed to hold its loss for the month to a modest 1.4%.

Trade headwinds could continue to threaten Einhorn's core long holdings, but they may offer some help to his various shorts. The sight of some of his biggest losers of 2018 going red again in May might cause Einhorn to sweat just a bit - and his investors perhaps more so.

Verdict

Einhorn's 2019 turnaround should probably be considered at least a tentative win for value investors everywhere. For years, many of us were forced to hunt for ever scarcer value opportunities as the relentless "bull market in everything" dragged on. Seeing a standard-bearer for the discipline making gains after years of pain is heartening.

However, it is still far too early to tell whether Einhorn has truly managed to put the bad times in Greenlight's rear-view mirror. There is a lot that could go wrong, including an unexpected intensification and prolongation of the trade war, as well as the Trump administration's increasing tendency to impose tariffs on many major trading partners.

The market in 2019 remains surprisingly calm, all things considered. Einhorn made a reputation for himself by seeming to think several steps ahead and identify value opportunities where others could not. Whether he wins or not, the process has received some welcome vindication at the very least.

Disclosure: No positions.

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This article first appeared on GuruFocus.