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David Einhorn's Latest Value Picks Look Interesting

- By Rupert Hargreaves

I have discussed David Einhorn (Trades, Portfolio) and his style of value investing several times before. While the past several years have not been kind to this hedge fund manager, his track record over the long term is highly impressive. Since its inception in May 1996, Greenlight Capital L.P. has returned 2,134% cumulatively.


Unfortunately, 2017 was yet another bad year for Einhorn and his team at Greenlight. According to his fourth-quarter and full-year letter to investors, the hedge fund produced a return of only 1.6% for the year net of all fees and expenses. For the fourth quarter, the fund was down 1.6%.

Rough year slows gains

In his letter, Einhorn acknowledges that "Despite it being a good year in the market, it was a challenging environment for our investment style."

The fund's investment style is, of course, value, and 2017 was not a favorable year for the style. That said, Einhorn remains committed to his positions, noting in the letter: "We have a value orientation, and we take comfort from the margin of safety afforded by the low valuations of our long investments." He went on to say that value investing is "clearly out of favor at the moment" as last year the "Russell 1000 Pure Growth Index outperformed the Russell 1000 Pure Value Index 38% to 4%."

However, rather than give up and switch to value, Einhorn said Greenlight is "sticking to [its] strategy of being long misunderstood value and shorting 'not value.'"

To give him credit, Einhorn would have had a good year if he ran a long-only fund. His "bubble basket" shorts cost all of his positive performance as shares in companies such as Caterpillar (CAT), Amazon (AMZN), Athenahealth (ATHN), Netflix (NFLX) and Tesla (TSLA) surged higher.

Hunting for value

So what is Einhorn buying in the current environment? Well, his letter details several new positions opened during the quarter, all of which offer value in one way or another. But with two, in particular, it's quite easy to see why they are cheap.

The first Einhorn value stock is Ensco (ESV). This offshore driller has seen the value of its shares cut by around 90% since the beginning of 2013. Languishing oil prices have resulted in customers cutting contracts short, the company having to write off billions in assets and slash costs to remain liquid. Even though the outlook for the offshore oil drilling sector is unclear, the cheapness of Ensco's stock seems to have been too much for Einhorn to pass up. As he describes in his letter: "We initiated a small position in Ensco (ESV) at an average of $5.72. ESV is a leading operator of offshore rigs...ESV trades at 4x EBITDA and 2.5x free cash flow on our mid-cycle estimates. ESV shares ended the year at $5.91."

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Greenlight's other interesting value play is Brighthouse Financial (BHF), which was recently "spun out of MetLife and was formerly most of MetLife's U.S. Retail business, selling annuities and life insurance." It seems everyone hates this company. According to Einhorn's letter, the "tone of the spin-off road show was noticeably downbeat, with management advancing a business plan that does not sound particularly exciting for shareholders." Unsurprisingly, this resulted in a busted initial public offering with the stock falling 25% in the months after hitting the market. While no capital return is expected until 2020, the stock has a valuation of "just 56% of book value and 6.4x 2018 EPS estimates."

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At this valuation, the downside is limited, but there is plenty of upside. Unlike other companies that are primed for perfection, Einhorn believes Brighthouse has "cushion built in for a bear market." Using conservative estimates, he thinks the stock could be worth 40% to 50% more compared to peers.

With these two stocks, the value is apparent. Both are dirt cheap with plenty of cushion built in if markets suddenly tank. On the other hand, if everything goes well, there could be sizable gains on offer. They are probably worth a second look.

Disclosure: The author owns no stocks mentioned.

This article first appeared on GuruFocus.


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