Greenlight Capital's David Einhorn (Trades, Portfolio) is a true value investor who buys companies at low earnings multiples and shorts overvalued ones like Tesla (TSLA) and Netflix (NFLX). Einhorn generated about 13.8% in a nearly 30% year for the S&P 500. However, he did so with a net long exposure in the 60% range. You can find his fourth-quarter 2019 letter here.
His five biggest longs are:
Brighthouse Financial (BHF)
Green Brick Partners (GBP)
General Motors (NYSE:GM)
Einhorn also discussed two short ideas:
Assured Guaranty (NYSE:AGO)
He also discussed some smaller long ideas. Surprisingly, because of Einhorn's high-profile feud with Tesla's Elon Musk, he did not discuss Tesla except by mentioning he is short the stock through puts and it is not a top 10 position.
Einhorn is positioning Greenlight very aggressively. The fund has 96% of capital in its top 10 long ideas and 47% of its capital in its top 10 short ideas. That is a portfolio you have to monitor like a hawk because it can quite easily go against you on both sides. On the other hand, by concentrating on the highest alpha ideas is how the best of the best generate staggering performance track records.
Einhorn is long AerCap (NYSE:AER), which leases new and mid-life airplanes to airliners. Its planes are leased 99% of the time and have a seven and a half-year average remaining term on their leases. According to Einhorn, the company is well managed by a strong capital allocator. He has been invested since 2014. Since then, the company has bought back 42% of its shares. Einhorn pointed out an interesting fact:
In September and November, two smaller peers with inferior platforms and returns on equity agreed to be acquired for 111% and 117% of book value.
And on the highly relevant Boeing (BA) crisis, he said:
"The suspension of Boeing 737 MAX deliveries since March 2019 and the subsequent recent production halt has reduced global narrow-body deliveries by 50% and structurally strengthened demand."
Brighthouse is in the variable annuity business. The Securities and Excange Commission has a nice primer on those products here and the basics are that:
"The insurer agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments. A variable annuity offers a range of investment options. The value of your investment as a variable annuity owner will vary depending on the performance of the investment options you choose. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three."
Einhorn raises a very interesting point about Brighthouse:
"In nearly every analyst report (1 buy, 9 holds, 4 sells), potential investors are given stern reminders that BHF is "sensitive" to equity markets. Analysts seem to be ignoring (or in couple cases underplaying) that this sensitivity goes both ways. Since none of the analysts have delved into what happens to BHF in a strong stock market, it's no surprise that they don't recommend the stock."
Einhorn believes the returns of the S&P 500 last year added at least $2 billion of free cash flow. That's a lot on a $4.4 billion market cap, especially since the company already generates an operating cash flow of $2.8 billion. The company has a fair amount of debt, but that can be supported by this business and its cash balance that runs in the billions. On an enterprise value to Ebitda basis it trades at 4.6.
The short idea that Einhorn spends the most time on in this letter is Netflix (NASDAQ:NFLX). Greenlight took the opportunity at the end of 2019 after a run-up in its share price to build it up into a bigger short position.
Einhorn thinks the story has forever changed with new incumbents entering the streaming market, like the much-publicized move by Disney (DIS). In total, Einhorn counts half a dozen competitors. Should bulls dream of future subcounts in terms of the global population and price rises, he thinks this narrative will come to an end.
There are also catalysts that could put pressure on Netflix as per Einhorn:
"It appears to us that new subscription growth is slowing and cancellations are accelerating. Competition is denting the domestic NFLX story, just as the platform loses its two most popular shows, 'Friends' (in 2020) and 'The Office' (in 2021), forcing management to spend aggressively to create and market bing-and-forget Netflix Originals and stand-up comedy specials, which lack staying power. In response, management has decided to stop disclosing U.S. margins and subscriber totals beginning in 2020."
Einhorn believes international subgrowth is slowing as well, while the revenues are marginal because of low $4 subscription prices. Meanwhile, Netflix is trading at 81 times earnings.
I haven't seen Einhorn so aggressively positioned in quite some time. He seems poised to start hitting it out of the park again.
Disclosure: Author is long Brighthouse Financial and AerCap.
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This article first appeared on GuruFocus.