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Einhorn Still Bearish on Tesla, Prefers GM and Energy Stocks

Faizan Farooque

Billionaire David Einhorn recently had a lot to say on a number of prominent stocks in Greenlight Capital’s 2019 Q3 investor letter. You can download a copy of it here.

Greenlight Capital finished with a return of 24% during the first 3 quarters of 2019, beating the S&P 500 Index ETFs by 3.5 percentage points. Our calculations indicate the top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th, outstripping the S&P 500 ETF (SPY) by 4 percentage points. The results clearly indicate that the hedge funds’ stock picks continue to beat passive investment strategies in the year thus far.

Greenlight Capital Investor Letter

David Einhorn had a lot to say on the stocks he was bearish on and went into great detail on Tesla (NASDAQ:TSLA) as well, a stock on which he is bearish. Here is what he said about this stock:

"Tesla (TSLA) and Chemours (CC) were material losers during the quarter. TSLA shares recovered from $223.46 to $240.87. Unit sales in the June quarter improved more than we expected compared to the March quarter.

Even so, TSLA appears to continue to spin positive PR ahead of the safety and fair treatment of its customers. For example, in August Walmart sued TSLA because its solar panels were catching on fire. Rather than warn its solar customers when TSLA became aware of the fire risk, TSLA allegedly created Project Titan – a covert program to replace the defective components while staying out of the news. Similarly, in response to a series of car battery fires, instead of recalling the batteries, TSLA appears to have quietly issued a “software update” to the battery management system that has a side effect of reducing battery range. TSLA has chosen not to warn or compensate its customers for the decreased performance.

Finally, to the surprise of nobody, documents in TSLA’s SolarCity litigation unsealed in September showed that Elon Musk knowingly orchestrated a significant fraud by arranging the $2.6 billion acquisition at a time when SolarCity was insolvent. Musk and his family had a huge conflict of interest, but rather than properly recusing himself, Musk initiated the transaction and drove the process. SolarCity was so cash-strapped, it was trying to delay payments to vendors after parts were delivered and the vendors had recognized the revenue; SolarCity could not raise any funds at reasonable rates from third parties; and Musk engineered the unveiling of the Solar Roof tile to convince TSLA’s shareholders to approve the deal, even though the product did not exist at the time. As was the case with Musk’s extraordinary “funding secured” tweet last year, we believe this level of [the] trampling of standard processes of corporate governance, ignoring methods to deal with related party transactions and self-dealing should lead to substantial consequences. For now, the accepted reality appears to be that Elon Musk is above the law."

We have extensively reported on Tesla in the past as well, noting some of the pitfalls facing the company. Our June 2019 article notes some of the issues the company is facing, such as founder Elon Musk’s frequent run-ins with the SEC and potentials of a debt trap due to ballooning long-term obligations. At the same time, the article highlighted several positive aspects of Tesla's recent performance.

Interestingly, the number of long hedge fund positions rose by 5 in recent months. Our calculations also showed that TSLA isn’t among the 30 most popular stocks among hedge funds. At the end of the second quarter, TSLA was in 37 hedge funds’ portfolios. There were 32 hedge funds in our database with TSLA holdings at the end of the previous quarter.

Interestingly, Einhorn was not long any of the mega-cap energy stocks like Exxon Mobil Corp. (XOM), but he has a long position in Ensco Rowan which recently changed its name to Valaris plc (NYSE:VAL) and CNX Resources Corporation (NYSE:CNX). Einhorn has also been long General Motors (NYSE:GM) since 2012. General Motors has been trading at a very low "forward" PE ratio since then, yet for some reason it hasn't made enough money to earn back its entire market cap.

Disclosure: None. This article is originally published at Insider Monkey.