Hedge fund legend David Einhorn released his Q2 investor letter on July 7. He detailed six U.S. trading positions that Greenlight Capital exited during the quarter, and he noted one new buy. That buy, Seagate Technology (STX), is down big on Thursday because of revised guidance that will significantly affect its next quarterly EPS.
Seagate is the second position where Einhorn has been unlucky on the timing this year. In the first quarter, he described the fund’s new position in Yahoo (YHOO) based on a sum of the parts valuation model. The idea was that the company had significant assets, particularly in China, that investors weren’t giving proper consideration to. Soon after Einhorn’s buy it came out that Ailibaba (OTC:ALBCF), which Yahoo has a significant stake in, had secretly spun off its very lucrative payment system, Alipay. Yahoo CEO Carol Bartz assures investors that Yahoo will be compensated, but the whole transaction puts in doubt the value of Yahoo’s Chinese assets. Because of that, Einhorn exited the position in the second quarter with what he called a modest loss.
Like Yahoo, the value of Seagate dropped significantly after Einhorn wrote about it. Einhorn said that he believes Seagate has $3 of earnings power and should operate in a more stable industry now that there are only three major players, rather than five. Unfortunately after announcing earnings on Wednesday, it was forced to adjust its future outlook because of higher input costs, particularly with rare earth metals and uncertainty with the U.S. budget debate and the economy. Shares are off about $2 since the end of Q2.
Einhorn also mentioned selling out of Cardinal Health (CAH), which he had bought in Q2 2009 before it spun off CareFusion (CFN). That transaction helped to unlock the value in Cardinal Health and he exited the position with significant gains. The fund continues to own CareFusion shares.
CIT (CIT) was another position that Einhorn completely sold out of in the quarter. He was one of a group of hedge fund managers that bought CIT debt before its bankruptcy. That debt was later converted to equity when the company emerged out of bankruptcy. Einhorn noted that he bought more shares at that point, but has now exited the position after being disappointed in management. While he doesn’t detail the gains made on the CIT investment, other than noting they were good, the debt portion that was converted must have substantially increased Greenlight Capital’s returns last year.
Einhorn completely sold out of his position in Xerox (XRX) in Q2. He had originally bought into the stock in the first quarter in 2010. In his letter, Einhorn said he expected Xerox’s Affiliated Computer Systems acquisition to pay off more, but the fund still saw a modest gain with the stock.
Mi Developments (MIM) is a name that Einhorn first bought in 2003 and turned out to be one of his most frustrating positions. Kerrisdale Capital Management had an article on Seeking Alpha a few months ago about the Mi Developments saga. It’s not pretty, and Einhorn got caught up in it and was forced to take an activist position. His activism led to losses in court, unsuccessful meetings with the chairman (and troublemaker) Frank Stronach, no luck with the Ontario Securities Commission and, finally, a trade with the devil in order to get Stronach to surrender the company. Einhorn finally sold out of the position in this past quarter.
Contrast that nightmare with MDC Holdings (MDC). He sold out most of his holdings in MDC years ago, and finally closed the position in this past quarter. MDC was one of Einhorn’s first position in Greenlight Capital. He bought into the name on the first day and, according to Einhorn, it was one of the biggest contributors to the fund’s returns. This homebuilder has a great yield but, unsurprisingly, has seen losses in three out of the last four years.