At any given time Greenlight Capital holds both long and short positions, with a marked inclination to long. Independent of the market swing, its bottom-up value analysis of companies is expected to yield positive returns for Greenlight’s investments. This proprietary analysis aims to identify investments based on misconceptions in the market, either on the long or short side. During the initial years, David Einhorn focused on finding opportunities in the following areas:
In the late 1990s, many insurance companies were structured as mutuals, implying the policy holders were “owners” with limited rights. Demutualizations involved an IPO with a percentage from the sale of the stock going to the company (100% is best). Effectively, the new investors get the company for free, as they now own the IPO proceeds as well as the company. Also attractive was the fact that mutuals dis-incentivize making a profit, and hence once they become public companies, they start to show good profit.
The best investment in this regard was a huge 15% position in Summit Holdings Southeast in May 1997 at $15 per share. The investment thesis involved recognizing that it had all the benefits of a demutualization: conservative accounting as a mutual, IPO proceeds going to the company, and a management team with a large initial stock and option grant. The investment panned out really well when Liberty Mutual agreed to acquire the company at $33 per share.
Certain kinds of spin-offs have the dynamics already set in motion whereby the spun-off new company can grow at a healthy pace without much ado. Greenlight’s early investments that provided handsome returns in this area included Reckson Services (renamed as Frontline Capital) and Triad Hospitals. Stocks of Reckson Services were purchased, at $5 per share in 1999 after recognizing the company held a money-losing internet start-up called OnSite. Ultimately, the investment provided a 12-fold return after the company unveiled plans to convert OnSite into an internet incubator. Triad Hospitals was another more traditional spin-off that doubled during the same time period.
Below is a look at Einhorn’s long bets that were exited recently with handsome returns:
- Toll Brothers Inc (TOL): Greenlight entered this position at ($16.36) and exited ($23.18) all in a matter of two weeks of the 1st quarter of 2008 with an Internal Rate of Return or IRR (annualized effective compounded return rate) of 547,256%. Einhorn summarized the roundtrip as “We thought the sell-off in homebuilders was overdone and began to add exposure. After we bought a partial position, the shares generated two years’ worth of return in two weeks. We exited.”
- ]Patriot Coal Corp (PCX): Initiated at $39.09 and exited in the 3rd quarter of 2008 at $140.37, this position yielded an IRR of 2,112%. The long vision involved recognizing great management dynamics and a lead in the coal markets. The exit was especially well-timed.
- HCA Term Loan: An opportunistic buy entered at 78c and exited at 87c on the dollar in the 1st quarter of 2009, HCA returned an IRR of 105% during the market lows.
- Jones Apparel Group (JNY): The position was initiated at an average purchase price of $2.80 when the stock traded as though it was going broke. Einhorn exited JNY at $9.36 for an outstanding return, as the market adjusted to approach fair value eventually.
- Harman International (HAR): Recognizing an unloved turnaround and margin improvement story, Greenlight started this venture at $11.07. The stock advanced rapidly to more than double and the fund exited with an outsized IRR of 687%.
Levered Stub Basket
During the credit bubble crisis of 2008, Greenlight invested small stakes in 22 companies that were gasping for survival, believing majority of them would survive. The way things turned out, they all survived and the fund neatly exited the position in the 4tg quarter of 2009 with a stunning 227% IRR.
- BJ Services, McDermott International (MDT) and Patterson-Uti Energy (PTEN): These stakes in the energy services area were initiated during the credit crisis at $10.42, $10.47, and $9.50 respectively and eliminated at $19.98, $24.72, and $15.33 in that order in the 1st quarter of 2010 after realizing a tidy IRR of 105%, 136%, and 80%.
- EMC Corporation (EMC): This wager was entered at an average purchase price of $11.28 and exited at $14.63 in the 3rd quarter of 2008 for a 40% IRR. The investment argument involved recognizing that the core storage business was attractively priced.
- Ford debt: The debt was purchased at 43c and disposed at 87c on the dollar for an outstanding IRR of 143%. The secured bank debt was purchased at a discount to cash on the conviction Ford would not only survive, but also have sufficient assets to cover the loan.
- Lanxess: Einhorn identified Lanxess investment as the second most profitable call he has ever made. The stock was initially purchased in 2005 in the low teens and exited in the early 40s in 2007. This play had an encore when it was bought back in the teens in late 2008 and sold in the low 40s again in 2010.
Below is a list of Einhorn’s long bets that were exited recently, either because the analysis was flawed or because the management of the company deviated from the projected path:
- Sanofi-Aventis (SNY): This position was entered at €48.15 and exited at €46.45 in the 3rd quarter of 2008 for a slight loss of -2% IRR. The investment argument involved recognizing a good pipeline and patent protection but as doubts emerged the position was quickly abandoned.
- Standard Life PLC: The stock was purchased at £2.67 and exited at £2.20 for a loss of -7% IRR in the 3rd quarter of 2008. Though the groundwork recognized this as an attractive demutualization opportunity, a deteriorating industry and competitive environment combined with poor management execution and capital allocation sealed its fate.
- Aldar Properties: One of the rare big losses in the long portfolio in recent years – the stock was purchased at 12.11 AED and sold at 2.49 AED in the 1st quarter of 2009 – the downfall was fueled by a combination of lower oil prices and imploding emerging markets.
- Dr Pepper Snapple Group, Inc (DPS): The stock was acquired on the spin-off theory at $23.84, but both earnings and outlook disappointed. The fund exited the position at $17.68 for a loss of around -50% IRR.
- Nyrstar: The position was initiated at €17.46 on the expectation the new CEO would turn around the company. When that did not materialize, the position was exited at a significant loss at €7.03 for -40% IRR.
- Lockheed Martin Corp (LMT): The position was brought into the fold at $85.14 and exited at $68.90 in the 3rd quarter of 2010, realizing significant losses of -39% IRR. Lower cash flows and margins along with deteriorating outlook for defense spending than anticipated caused the exit decision.
- Foster Wheeler (FWLT): The chance was taken at $26.25 and exited at $24.25 for a small loss of -10% IRR in the 4th quarter of 2010. The investment study involved recognizing that the stock was trading cheaply based on mid-cycle earnings. But, it turned out, mid-cycle was taking a long time to appear.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.