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David Einhorn Roars Back With Value Bets

- By Rupert Hargreaves

As anyone who follows my articles will know, I have been following the performance of David Einhorn (Trades, Portfolio)'s Greenlight Capital closely over the past two years.


I've been particularly interested in Einhorn's performance because he has carved out a reputation for himself as being one of the best value investors around. But, in recent years, his performance has deteriorated.

Indeed, last year, Greenlight posted its worst-ever performance, losing a total of 34% for investors. That's the worst performance since 1996, a timeframe that includes both the financial crisis and the bursting of the dot-com bubble.

I've been interested to see how this seasoned value investor copes with this loss, and what actions he has decided to take following his worst year on record.

Making a recovery

Greenlight's performance picked up with equity markets during the first quarter of this year. The Greenlight Capital funds returned 11% during the January to March period, making back all of the losses from the fourth quarter of 2018. According to reports, the strong performance continued on into April. At the end of April, Greenlight was up 19% for the year according to reports. That's an impressive comeback for this value investor.

Einhorn lost a significant amount of money last year on his Tesla (TSLA) short, and this year, as shares in the company have continued to plunge, this position has turned profitable. But I'm not really interested in Einhorn's shorts. I'm more interested in his positioning on the long side, particularly his value-focused investments in companies like Brighthouse Financial (BHF) and Green Brick Partners (GRBK).

Both of these are fantastic examples of why it is so important to ignore price action and concentrate on the fundamentals when value investing.

Sticking with the thesis

Brighthouse was one of Greenlight's worst-performing positions last year, but the stock rallied significantly during the first quarter of 2019.

Brighthouse is a complicated business to understand. It provides life insurance policies, the accounting for which is particularly fiendish. The company purchases hedges to mitigate its exposure to equity markets and interest rate risks, which have to be marked to market every quarter.

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As Einhorn explained in his first-quarter letter to investors, as the company invests insurance premiums received, it profits from rising equity markets and interest rates. "All else being equal, BHF benefits from rising equity markets and higher interest rates, as the economic gain from lower expected claims more than offsets the company's losses on its hedges," he wrote. However, due to the way hedges are treated under GAAP accounting, "while the hedges generate mark-to-market losses, there is not a corresponding reduction in GAAP liabilities."

Einhorn believes that this volatility is putting off investors, but he's willing to look through the noise and concentrate on the underlying business. The fact remains that the company intends to repurchase around a third of its outstanding market capitalization by 2021.

With the stock trading for less than a third of book value, this seems to be a desirable use of capital, and Einhorn believes that it is worth waiting for this opportunity to play out. And it seems his patience is already paying off. At the beginning of May, the stock was up 40% for the year.

Bright outlook

After a rough end to 2018, Green Brick is also charging back this year. The stock is up 25% year-to-date.

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It is easy to see why investors are returning to the company. At the beginning of the month, the company reported a 13.6% year-on-year increase in earnings for the first quarter of the year with a 33.3% increase in the number of residential units completed by the business and a 54% increase in the number of homes under construction.

The dollar value of backlog units as of March 31, 2019, was $307.5 million, an increase of 35.8% year-on-year, implying that the company is on track to see a substantial increase in earnings over the next 12 to 24 months as it ramps up production.

Disclosure: The author owns no share mentioned.

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This article first appeared on GuruFocus.