What Does David Einhorn Like About Chemours?
I like to follow the investments of David Einhorn (Trades, Portfolio) because he has a reputation for being one of the best value investors of all time.
His strategy has come unstuck in recent years. However, over the two decades from when he started his hedge fund Greenlight Capital in 1996 to 2016, he produced an average annual return for his investors in the region of 16% after fees.
These results show that Einhorn has an impressive track record of picking value stocks and holding on to them through thick and thin until the value is realized.
Topping up the holding
In the third quarter of 2019, according to Greenlight's 13F SEC filing, Einhorn was busy topping up some of his favorite value positions. The largest increase was in Chemours Co. (NYSE:CC). He increased the size of his stake in the company by around 75%, taking the holding to 6.5 million shares for a 7% portfolio weight.
Einhorn's bet on Chemours is a traditional value play. The hedge fund initiated a position in the second quarter of 2019 after the stock declined on speculation that new liabilities relating to fire fighting foams produced by the group, as well as historical liabilities related to a chemical used to make Teflon, could cost the company billions of dollars in legal fees and fines.
This isn't the first time Einhorn has bought into Chemours on the basis that the market is overestimating the company's liabilities. He first added the stock to Greenlight's portfolio in the fourth quarter of 2015, according to my research. He kept buying the stock, accumulating a position of 16.4 million shares at its peak before eventually selling out in the fourth quarter of 2017.
Previous encounter
In 2015, Einhorn believed that the market was overestimating Chemours's liabilities stemming from a historical PFOA lawsuit. The market thought that the company would ultimately have to pay out $5 billion to settle outstanding claims.
In the end, Chemours settled for just $335 million with the payment split between it and DuPont. Einhorn's average purchase price with this initial trade was less than $10 per share. He was able to sell at prices up to $50 per share.
Einhorn has come into this new battle with a solid understanding of the company and its potential liabilities. Warren Buffett (Trades, Portfolio) is a fan of saying you should only buy what falls inside of your circle of competence. As Einhorn has been an owner of Chemours for the best part of four years now, he should certainly know what he's getting involved with.
High risk, high return
Einhorn and his team believe that the chemicals company has the potential to generate earnings per share between $8.50 and $10 for 2021, according to the hedge fund's third-quarter letter to investors.
A sector average multiple of 14 on this estimate gives a potential share price of $140 at the high end. At the time of writing, the stock is trading at just $15 and offers a prospective dividend yield of 6.6%.
I'm not going to claim to know a vast amount about the chemicals sector and the liabilities Chemours is facing, but what is quite easy to see here is the fact that is this situation offers a highly attractive risk-reward ratio.
If Einhorn is on the money here, he could be looking at a potential ten times return on investment, similar to the sort of performance he achieved with this same company in the past. That being said, if he is wrong on the liabilities the company is facing, shareholders could lose everything.
Disclosure: The author owns no share mentioned.
Read more here:
What Does Seth Klarman See in Vista Oil & Gas?
Warren Buffett and the Problem of Patience
Warren Buffett: Why the Returns of Borrowing Money Are Not Worth the Risks
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
This article first appeared on GuruFocus.
