David Einhorn’s Greenlight Capital sent investors a letter on November 7, 2011. He opened the quarterly letter by discussing fund returns: “Greenlight Capital, L.P., Greenlight Capital Qualified, L.P. and Greenlight Capital Offshore (collectively, the “Partnerships”) returned (1.2)%, (0.6)% and (0.8)% net of fees and expenses, respectively, in the third quarter of 2011, bringing the respective year to date net returns to (6.2)%, (5.6)% and (6.1)%.”
Next, Einhorn went on to discuss the presentation he gave at the Value Investing Congress, the one in which he explained why he was shorting Green Mountain Coffee Roasters (GMCR). Shares of GMCR plummeted afterwards, and so did shares of other companies similarly situated, like Sodastream (SODA). In the quarterly investors’ letter, Einhorn writes:
After our presentation, one of the largest GMCR shareholders sent us a Keurig coffee brewer and ten K-cup boxes of coffee straight from the warehouse. Not only did we appreciate the gesture, it was nice of them to assist in our field research, as the majority of the K-cups were too close to expiration to be sold through normal retail channels.
More importantly though, Einhorn took the time to spell out Greenlight Capital’s strategy, explaining the firm’s investment choices. Here is a list of the three stocks in which Einhorn initiated new positions during the third quarter:
CBS Corporation (CBS), the famous television station, digital content producer and publisher is a new position for Einhorn. Einhorn believes the company will benefit heavily “from growing retransmission fees (payments) by cable operators for the right to carry CBS stations. We believe this income stream could amount to several hundred million dollars of new earnings to CBS annually.” Einhorn also explained, “The company has also been early and aggressive in pursuing high margin incremental deals with online video streaming services like Netflix (NFLX) to monetize its content library.” Einhorn bought in at $20.79 a share. The company most recently traded at $25.82, with a one-year target estimate of $30.55. If analysts are right, Einhorn stands to gain roughly 50% from the position. It also has a 40 cents dividend. CBS was popular with Chris Hohn’s Childrens Investment Fund and Ken Heebner’s Capital Growth Management in the second quarter.
General Motors Company (GM) is the largest auto manufacturer in the U.S. The government had had to bail out the company in 2008, but it is rapidly getting back on track. Last November, GM was able to complete an IPO of about 30% of its stock at $33 a share and swelling to almost $40 a share toward the end. The U.S. government still owns one-third of the company. Einhorn bought in at $25.78 a share, on average, after the IPO bubble burst. He believes, “there might be a better opportunity later when the government [will have] exited the rest of its stock.” The company is currently trading at $23.33 a share but analysts predict it will reach $38.15 in the next 12 months. If so, Einhorn would stand to gain a roughly 50% return. Jeffrey Tannenbaum’s Fir Tree and Frank Bosens’ Taconic Capital are bullish on GM.
Marvell Technology Group (MRVL) designs the semiconductors that go in cell phones and hard disk drives. The stock took a hit lately as some people speculated that hard disk drives were going to be replaced by solid state drives (SDD). Einhorn doesn’t think that change is coming anytime soon and Marvekk just picked up a slew of new customers to offset its sales to Research in Motion (RIMM), its largest customer. Einhorn bought in at an average $13.35 a share. It recently traded at $14.27 a share, with a one-year target estimate of $17.97. Stuart Peterson’s Artis Capital Management and Lee Ainslie’s Maverick Capital.
Einhorn sold out of Pfizer (PFE) in the third quarter, explaining Greenlight was “increasingly concerned about future reimbursement cuts for branded pharmaceuticals and the recent disclosure of additional government investigations into its marketing practices.” Over the two and a half years Greenlight had the positions, “the investment generated a double-digit annualized return that modestly outperformed the market.” Greenlight also sold out of its position in BP Plc (BP). Einhorn writes, “We sold BP at a roughly break-even result in fear of falling energy prices and to make room for new opportunities. Einhorn also walked away from Amedisys (AMED), citing “Reimbursement reductions, aggressive accounting and questionable business practices finally caught up with the company,” as the cause.
The top five stocks in Einhorn’s portfolio at the end of the third quarter include: Apple Inc (AAPL), Microsoft Corp (MSFT), Vodafone Group Plc (VOD), Market Vectors Gold Miners ETF (GDX) and physical gold. We like Einhorn's stock picks and imitate some of his bets. We believe investors can outperform the market over the long-term by doing the same.
Additional disclosure: I am long physical gold.