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Einhorn Buys Twitter, Time Warner, Ensco

- By Holly LaFon

Greenlight Capital Re's David Einhorn (Trades, Portfolio) lamented a bum year in his shareholder letter for 2017 with an investing loss of 1.6% net of fees. He also announced the new lineup of stocks he selected during the fourth quarter: Twitter, Ensco and Time Warner.


Twitter

First, Einhorn surprised investors by taking a long position in Twitter. As he acknowledged in the letter, he has been betting that certain stocks in the tech space will fail. These stocks, which he collectively calls the "bubble basket," include Amazon (AMZN), Netflix (NFLX) and Tesla (TSLA).

Shares of social media site Twitter, which gives users 280 characters to express their thoughts and share news stories, shed more than a third of their market value since their January 2015 initial public offering, allowing Einhorn to nab them for a mere $21.59 each.

One of the most significant problems weighing on the stock was declining revenues, which slid a further 4% in the third quarter to $590 million. The company attributed what Twitter CFO Ned Segal called "improvements toward a return to revenue growth" to its renewed emphasis on video and direct response ad formats, as well as its its data business.

Loss per share improved to 3 cents from 15 cents the previous year. Twitter's monthly active users ticked up 4% from the previous year to 330 million, compared to competitor Facebook's 2.07 billion monthly active users.

Einhorn commented on the stock in his fourth quarter letter:


"Despite a massive user base and broad reach, TWTR has an enterprise value of about 2% of Facebook, the largest social media platform. New management improved the TWTR user experience, which led to rapid growth in number of users and time spent on TWTR in 2017. As a result, we believe TWTR will have a pitch to advertisers in 2018, which should lead to revenue growth. Restructuring actions taken over the past year will allow much of the revenue to fall to the bottom line, and we expect TWTR to begin to close some of the 25% margin gap vs. its social media peers. TWTR shares ended the year at $24.01."



Ensco

Einhorn also ventured into the rallying oil market, buying shares of Ensco (ESV) for an average price of $5.72. Since June, the price of a barrel of Brent crude have pushed up 50% to roughly $70. Prices have advanced on increased global demand and tighter supply, which has squeezed once abundant reserves, according to Bank of America Merrill Lynch.

Tax reform may also present a positive outcome for energy stocks. Bank of America Merrill Lynch has revised its revision for fourth quarter earnings for the sector by 25% on higher energy prices.

Einhorn commented on Ensco:


"We initiated a small position in Ensco (ESV) at an average of $5.72. ESV is a leading operator of offshore rigs. After oil collapsed in 2014, offshore exploration and development budgets were severely cut and the industry responded by scrapping rigs, cutting costs, and engaging in M&A. At the same time, drilling costs have fallen, cash flows at customers have risen, and structurally, we think that shale oil supply growth will be unable to meet global demand, leaving offshore drilling to fill that gap. ESV trades at 4x EBITDA and 2.5x free cash flow on our mid-cycle estimates. ESV shares ended the year at $5.91."



Time Warner

Einhorn picked up shares of Time Warner (TWC) for $89.72 on average in the wake of the U.S. government's delaying its sale to AT&T (NYSE:T).

The two communications giants agreed to a $108 billion merger on Oct. 22, 2016, with the expectation of the deal closing in late 2017, but the Department of Justice has held up the proceedings by bringing an antitrust case against the companies. Initially, the companies delayed the deadline to April 22. In December, an SEC filing said that the closing date had been pushed back to June 21.

The deal allows AT&T to distribute Time Warner's premium content library through its vast pay TV subscriber base.

A trial date for the antitrust case is set for March 19.

Einhorn commented on the holding:


"First, we think that the Department of Justice has a weak anti-trust case and the merger is likely to go through despite being challenged in court. Second, even if the government prevails and the deal breaks, the shares are cheap. We also believe TWX has several strategic options to create value if the deal with AT&T falls apart. TWX's earnings have continued to grow nicely through the merger review period, especially at HBO which is accelerating its subscription revenue growth. Notably, TWX has suspended its buyback with the merger pending and has become under-levered. TWX and Netflix now have roughly the same enterprise value, despite TWX having a better library, an exciting content creation engine and substantial current profitability. We doubt the shares have much downside at the year-end price of $91.47."



See David Einhorn's portfolio here.

This article first appeared on GuruFocus.


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