Greenlight Capital: Are The Moves Too Late?

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Includes: AABA, AAPL, ADNT, AER, ANF, BHF, BLMN, CCR, CEIX, CLPR, CNDT, CNX, DDS, DSW, ESV, FIVE, GM, GRBK, IAC, MDCO, MU, MYL, ODP, PRGO, PYPL, ROKU, SFM, T, TPR, TPX, TWTR, URBN, VNTR, VOYA, XELA
by: Mark Bern, CFA
Summary

What the fund bought.

What it sold.

Analyzing the fund holdings.

Is the fund positioned for future growth?

David Einhorn has had a bad year (or maybe a few bad years). Total AUM (assets under management) were as high as $12 billion in 2014. Today, AUM are about $5.5 billion, and of that total, about $1 billion is Mr. Einhorn's own money and another $1 billion is from a reinsurance company he controls. So, only about $3.5 billion is from outside investors. The holdings and activities come from the Form 13F filed with the SEC (Securities Exchange Commission) for the quarter ending March 31, 2018.

The fabled hedge fund manager has made some great calls in the past, posting market-beating returns for several years. Lately, not so much. What went wrong? We thought we would take a look at what our Friedrich algorithm thinks of his recent activity and current holdings to see if the worst is past.

Quarterly Additions to the Fund

The source of all the charts presented here is Yahoo Finance. There were a total of nine additions during the quarter, all of which, other than Brighthouse, were new positions for the fund.

Brighthouse Financial (NASDAQ:BHF)

The chart above (and all charts included) is YTD (year to date) to show how the stocks did in Q1, when purchases were made, and how they have fared since.

BHF was falling in Q1, which may have made it appear attractive to Einhorn, but it has kept falling and now trades below both its 50- and 200-day MAs (moving averages). So far, not so good, but this is just a chart, and we will take a better look at some analysis in a later section.

IAC InteractiveCorp (NASDAQ:IAC)

I think you can read the charts as well as I can, so I will dispense with further comments in the section.

Some are up but more are down since January, so it depends on when during Q1 each was purchased as to how things are going thus far. It appears that Einhorn is betting on a mixture of some turnarounds (value plays) and some growth. Only time will tell.

Quarterly Decreases in the Fund

Since there were 35 total decreases in positions during the quarter, including 17 positions completely closed out, we will not include charts on every one. Instead, we will simply include a table listing the companies in which the fund decreased its holdings and those which it closed completely (with losses realized on each of the closed positions).

Company Name

Symbol

Loss ($ millions)

Best Buy

BBY

$ (7,777)

Sold Out

Carter's

CRI

$ (6,366)

Sold Out

The Chemours Company

CC

$ (46,661)

Sold Out

The Children's Place Retail Stores

PLCE

$ (5,189)

Sold Out

Gap

GPS

$ (5,521)

Sold Out

Kohl's

KSS

$ (9,479)

Sold Out

Lowe's

LOW

$ (6,547)

Sold Out

Michael Kors

KORS

$ (3,231)

Sold Out

Nordstrom

JWN

$ (6,792)

Sold Out

J.C. Penny

JCP

$ (15,611)

Sold Out

SeaWorld Entertainment

SEAS

$ (3,180)

Sold Out

Shutterfly

SFLY

$ (12,539)

Sold Out

Signet Jewelers

SIG

$ (6,136)

Sold Out

Under Armour

UAA

$ (10,073)

Sold Out

Varex Imaging

VREX

$ (8,798)

Sold Out

Wayfair

W

$ (10,652)

Sold Out

Weight Watchers International

WTW

$ (13,315)

Sold Out

General Motors

GM

Decreased

Aercap Holdings

AER

Decreased

Mylan NV

MYL

Decreased

CNX Resources

CNX

Decreased

Voya Financial

VOYA

Decreased

Micron Technology

MU

Decreased

Perrigo

PRGO

Decreased

Altaba

AABA

Decreased

Apple

AAPL

Decreased

Twitter

TWTR

Decreased

Conduent

CNDT

Decreased

Adient plc

ADNT

Decreased

Consol Energy

CEIX

Decreased

Tempur Sealy

TPX

Decreased

DSW Inc.

DSW

Decreased

Venator Materials

VNTR

Decreased

Dillard's

DDS

Decreased

Clipper Realty

CLPR

Decreased

The fund lost money on every position closed out. Of those positions in which the fund decreased its holding, the results will, of course, depend upon the original purchased price and the price at which the shares were sold. There are some good picks that would have served the fund well had the positions been held, but there are also several that have been in a downward trend for the last year or more, and it was definitely best to cut the losses.

Analysis Methodology and Current Holdings

Next, we want to provide a simplified explanation of the methodology applied by our algorithmic analysis. In the next section, we will include analysis for each of the fund’s 35 current holdings which are listed in the table below.

Greenlight Capital Holdings

Company

Symbol

Price

Shares Held

Value

General Motors

GM

$ 39.16

22,614,400

$885,579,904

Brighthouse Financial

BHF

$ 41.71

11,040,000

$460,478,400

Aercap Holdings

AER

$ 54.59

6,552,162

$357,682,524

Mylan NV

MYL

$ 36.63

7,652,000

$280,292,760

Green Brick Partners

GRBK

$ 9.80

24,118,668

$236,362,946

CNX Resources

CNX

$ 17.39

10,639,404

$185,019,236

Voya Financial

VOYA

$ 47.08

3,908,568

$184,015,381

Micron Technology

MU

$ 53.23

3,347,000

$178,160,810

Perrigo

PRGO

$ 76.23

2,250,620

$171,564,763

Ensco

ESV

$ 7.26

20,000,000

$145,200,000

Altaba

AABA

$ 75.36

1,764,300

$132,957,648

Apple

AAPL

$187.97

628,100

$118,063,957

Twitter

TWTR

$ 46.65

2,505,000

$116,858,250

Consol Coal Resources

CCR

$ 15.10

5,488,438

$ 82,875,414

Conduent

CNDT

$ 18.59

3,846,600

$ 71,508,294

Adient

ADNT

$ 50.04

1,183,498

$ 59,222,240

Consol Energy

CEIX

$ 38.31

1,169,276

$ 44,794,964

Exela Technologies

XELA

$ 4.86

834,629

$ 4,056,297

Tempur Sealy

TPX

$ 51.39

781,700

$ 40,171,563

IAC InteractiveCorp

IAC

$155.50

249,700

$ 38,828,350

The Medicines Co.

MDCO

$ 38.45

1,000,000

$ 38,450,000

DSW Inc.

DSW

$ 27.61

1,260,000

$ 34,788,600

AT&T

T

$ 32.68

955,605

$ 31,229,171

Venator Materials

VNTR

$ 16.50

755,233

$ 12,461,345

Dillard's

DDS

$ 90.90

113,200

$ 10,289,880

Clipper Realty

CLPR

$ 9.07

847,500

$ 7,686,825

Five Below

FIVE

$ 98.90

70,700

$ 6,992,230

Urban Outfitters

URBN

$ 46.26

136,500

$ 6,314,490

PayPal Holdings

PYPL

$ 85.94

67,000

$ 5,757,980

Office Depot

ODP

$ 2.70

2,100,000

$ 5,670,000

Abercrombie & Fitch

ANF

$ 26.00

212,500

$ 5,525,000

Tapestry

TPR

$ 46.80

105,000

$ 4,914,000

Sprouts Farmers Market

SFM

$ 22.87

207,000

$ 4,734,090

Bloomin' Brands

BLMN

$ 19.54

218,000

$ 4,259,720

Roku

ROKU

$ 46.70

47,760

$ 2,230,392

Our algorithm is based primarily on FCF (free cash flow) analysis. The reason we use free cash flow (FCF) as the basis for much of our analysis is that it is difficult to manipulate, unlike earnings per share. When a company does not generate any free cash flow, our algorithm automatically assigns a Main Street Price (estimated current value) of zero. We do not gamble on companies that burn through cash without the ability to generate enough free cash flow to maintain operations without borrowing or diluting shareholders through stock issuance. There is nothing wrong with doing so, but we are risk-averse investors, so it does not align with our philosophy.

We also calculate free cash flow differently from the traditional method. Why? Because we have found (through backtesting) that by using our methodology, we can more reliably identify companies with significant growth potential. We simplify the calculation by leaving out all of the changes in balance sheet items that move up and down from one quarter to the next. We consider these to be mostly temporary noise that can be manipulated by management over the short term. Our calculation is simply: (Net Income + Depreciation + Amortization – Capital Expenditures) / Diluted Shares Outstanding.

We realize that we will get comments that tell us we are crazy for using this approach. But the results from the backtest stand the test of time over the 60-year period we used. We cannot take credit for this methodology, as it was first introduced by Arnold Bernhard, founder of The Value Line Investment Survey, many years ago. However, Value Line uses the calculated result for a different purpose than we do.

More recently (August 7, 2017), we created a portfolio based upon free cash flow analysis as the foundation of stock selection. We are very please with the results thus far:

We are the red line. So criticize our methodology if you like, but we will stick with what is working.

Our algorithm produces what we call data files and quantitative charts for each of the more than 17,000 stocks worldwide for which we provide analysis. Below are examples of a data file and chart for one of the components held in the Greenlight Capital Hedge Fund. We chose Apple for the examples because almost everyone will be familiar with the company.

Notice that we include ten years of ratios with each U.S. stock. This is important because consistency is one factor upon which we place a great deal of weight. Great companies tend to produce superior results regularly, with perhaps only a minor blip or two over a ten-year period. We can also identify companies that are improving from year to year using this systematic approach.

We focus primarily on FROIC (free cash flow return on invested capital), Friedrich Cash Machine (FCF generated from each dollar of revenue), Mycroft Yield (expected future 12-month investor earnings adjusted for debt), the Sherlock Debt Divisor (used to adjust ratios to account for a company’s capital structure), the Price-to-Mycroft Free Cash Flow (identifies companies priced well relative to an expanded version of FCF) and the Price-to-Bernhard/Buffett FCF ratio (identifies companies with superior growth prospects at reasonable FCF valuations). These ratios (and others) can explain a lot about a company in just a few seconds.

The key is to take the emotions out of stock selection and to try to not make a stock value fit your desired outcome. The algorithm is totally emotionless and based strictly on the math to give unbiased opinions about each company and the potential growth for its stock.

For a quick view of how much growth potential a stock has relative to its free cash flow valuation, we include a quantitative chart for each company. Here is one for Apple.

Friedrich rates Apple as a buy currently - a great company with superior FCF and a potential for steady growth.

I am including a link to each company’s investor web page for those who would like to learn more about any of the individual businesses. Here is a link for APPL.

As you can see, Friedrich identified the stock as a good value relative to its FCF as early as 2009 (in this 10-year chart), and it still remains reasonably priced. How do we see those results? The white line is the market price (or Wall Street Price; at year-end or recent for trailing twelve months (TTM)). The yellow line is the Friedrich Main Street Price (or estimated value). The red line signifies an overbought level, and the green line represents an oversold condition (or what we like to call a “bargain price”).

So, when the white line goes below the green line, the stock is considered a bargain and we buy the stock (as long as the company has posted consistently good results in the past).

When the Wall Street Price is no longer oversold (a bargain) but still below the Main Street Price, it still represents a good value and could be bought. When the Wall Street Price is above the Main Street Price but still below the Overbought Price, it is a Hold. The closer the white line is to the yellow line the stronger the Hold rating. When it rises above the red line and becomes overbought, Friedrich issues a warning signal. Risk-averse investors may want to sell a stock at that point. For the long-term, conservative investor, the warning may signal that it is time to review the holding and sell if its future potential no longer meets the investor’s expected total return requirements.

Analysis of Fund Holdings

So, with the explanations out of the way, let’s take a look at the charts for each of the 31 stocks out of the 35 held by the Hedge Fund that we cover (including AAPL above).

General Motors

Friedrich rates GM as overbought. It is important at this juncture to explain to readers that the algorithm is based solely on GAAP (Generally Accepted Accounting Principles) results, and that one-time events can temporarily impact the ratios in any given year. In this case, GM had significant deferred taxes on foreign operations that had built up over many years, which had to be recognized to conform to the recent tax reform legislation. This resulted in negative FCF for 2017 and the TTM periods. The company is in much better shape than at the previous peak in the auto sales cycle, but it remains a very cyclical business. You can take a look at the GM investors’ page here.

Brighthouse Financial

Friedrich rates BHF as overbought. When the Price-to-Bernhard/Buffett FCF ratio is zero or negative, the algorithm automatically assigns a value of zero to the stock. Negative FCF cannot produce a positive valuation when using FCF analysis. BHF is a relatively new public company with less than three years of market history. We will notice a number of such young companies in the fund holdings. Of course, it is not uncommon for hedge fund managers to swing for the fences, as many in that business have a gambler’s mentality. We prefer proven quality with strong future growth potential. Just a difference in style.

The BHF investors’ page here.

Aerocap Holdings

AER is ranked as overbought by Friedrich. The company has not produced FCF (by our calculation methodology) for the entire ten-year period. Still, Wall Street seems to like the stock.

Here's the link to the AER investors’ page.

Mylan NV

Friedrich rates MYL as a buy (based upon price only) but would not recommend it. It would be best to understand better the reason for the falling price before investing, especially since the stock price has been trending lower since 2014. The data file shows a lack of consistency and ratios that do not inspire confidence in its future. Also, Friedrich always flashes a warning on any stock with a Badwill ratio (a measure of goodwill and intangible assets relative to market capitalization) over 33%. Companies that overpay for acquisitions tend to accumulate high goodwill (Badwill) over time often resulting in excessive debt levels. There are two pieces in the evaluation and selection process: price and consistency. MYL fails the consistency part of the equation.

Link to MYL investors’ page.

Green Brick Partners

GBRK is rated overbought by Friedrich. It would have caught our eye back in 2013 for a deeper dive based upon its price to valuation at that time.

Link to the GRBK investors’ page.

CNX Resources

CNX benefited from one-time events in Q4 2017 and Q1 2018. Those are not likely to repeat. Eliminating those would likely eliminate FCF, as has been the case in years prior to 2017. Thus, CNX is rated as overbought (after adjustment) by Friedrich.

Take a look at the CNX investor page here.

VOYA Financial

Voya is rated as overbought by Friedrich.

Link to the VOYA investor page here.

Micron Technology

Micron has been rated a Buy by Friedrich. This is a case where consistency is somewhat lacking but the improving trend in strength of FCF generation is skyrocketing. The stock is volatile, but Friedrich thinks it had additional potential.

Take a look at the MU investor page here.

Perrigo

Friedrich rates PRGO a Hold.

The link to the PRGO investor page here.

Ensco

ESV is rated as overbought by Friedrich.

Link to the ESV investor page here.

Altaba

AABA is rated as overbought by Friedrich. This is the former Yahoo Inc. (after the sale of its operating company to Verizon), which now operates as a closed-end management investment company.

Take a look at the AABA web page here.

Twitter

TWTR is rated as overbought by Friedrich. It appears the company could be profitable in 2018, but FCF generation remains minimal.

Link to the TWTR investor page here.

Consol Coal Resources

SEC filings did not contain adequate data for our Friedrich algorithm to generate ratios and a chart. This, along with Consol Energy (NYSE:CEIX), is a bet on coal making a comeback under the Trump Administration.

Take a look at the CCR investor page here.

Conduent

After adjusting for the one-time impact of tax reform, Friedrich rates CNDT as overbought. Without the benefit of the tax law change and the one-time write-off of tax loss carryforwards, the company is FCF-negative.

Here's the link to the CNDT investor page.

Adient

Friedrich rates ADNT as overbought. A quick look at the last few quarterly financial results show a deterioration in FCF.

Take a look at the ADNT investor page here.

Consol Energy

SEC filings did not contain adequate data for our Friedrich algorithm to generate ratios and a chart.

The CEIX investor page here.

Exela Technologies

SEC filings did not contain adequate data for our Friedrich algorithm to generate ratios and a chart.

The XELA investor page here.

Tempur Sealy

TPX is rated a Hold by Friedrich.

Take a look at the TPX investor page here.

IAC InterActiveCorp

Friedrich rates IAC as overbought. This is an interesting Internet company with potential for which the price has just gotten ahead of itself. Friedrich rated the stock as a Buy in 2014, and the share price has risen more than 2½ times since then.

Here's a link to the IAC investor page.

The Medicines Company

MDCO is rated overbought by Friedrich. It was rated a Strong Buy back in 2010, and then Friedrich flashed the first of many warnings in 2013 as the stock price was peaking.

The MDCO investor page here.

DSW Inc.

Friedrich rates DSW as overbought.

Link to the DSW Investor page here.

AT&T

Excluding the one-time impact of tax reform, Friedrich rates T a Hold. The corporate tax cut should benefit T going forward, but only a small fraction of what it did in 2017. And then there is the Time-Warner acquisition and integration. The financial impact of the acquisition is not yet included in the data analyzed. We watch cautiously from the sidelines until a clearer picture emerges.

Link to the T Investor page here.

Venator Materials

Friedrich rates VNTR as overbought.

Here's a link to the VNTR investor page.

Dillard's

Friedrich rates DDS a buy. This is a well-run company in the very competitive and evolving industry of retail.

You can take a look at the DDS Investor page here.

Clipper Realty

Friedrich rates CLPR as overbought. REITs (real estate investment trusts) generally have little, or often negative, FCF after paying dividends. The industry is also highly sensitive to interest rates.

Here's a link to the CLPR Investor page.

Five Below

FIVE is rated overbought by Friedrich. But again, Wall Street seems to like it regardless.

Link to the FIVE Investor page here.

Urban Outfitters

URBN is rated as overbought by Friedrich.

Here's a link to the URBN Investor page.

PayPal Holdings

PYPL is rated overbought by Friedrich, but it is a great company.

Take a look at the PYPL Investor page here.

Office Depot

ODP is rated as a Hold by Friedrich.

Link to the ODP Investor page here.

Abercrombie & Fitch

Friedrich rates ANF as a Hold.

Link to the ANF investor page here.

Tapestry

TPR is rated as overbought by Friedrich.

You can take a look at the TPR investor page here.

Sprouts Farmers Market

SFM is rated overbought by Friedrich.

Link to the SFM investor page here.

Bloomin' Brands

BLMN is rated a Hold by Friedrich.

Take a look at the BLMN investor page here.

Roku

ROKU is rated as overbought by Friedrich. No FCF means an automatic valuation of zero.

Link to the ROKU investor page here.

Growth Prospects

The final tally is: four buys (one very questionable due to lack of consistency), six holds and 22 overboughts. That does not seem like a firm foundation for future prospective growth from our vantage point. But we have to keep reminding ourselves that many hedge fund managers are gamblers who try to time turnarounds and pick small companies that they expect will exceed expectations.

According to Friedrich, though, the growth prospects for the majority of the fund holdings is pretty grim. Of course, that is based primarily upon FCF analysis, and Mr. Einhorn apparently looks at companies from a very different perspective. And it is that for which his investors pay the big bucks (or at least those who are left).

We would prefer to take a more cautious approach and stick with proven winners that we expect to keep on winning.

If you have any questions, please feel free to ask them in the comment section below, and don't forget to hit the "Follow" button next to my name at the top of this article. For those who would like to learn more about my investment philosophy, please consider reading "How I Created My Own Portfolio Over a Lifetime" or check out my webpage at BernFactor.com.

Disclaimer: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from our research. Factual material is obtained from sources believed to be reliable, but the poster is not responsible for any errors or omissions, or for the results of actions taken based on information contained herein. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.

Disclosure: I am/we are long AAPL, PYPL, KORS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mark Bern, CFA, and Mycroft Friedrich collaborate on the Friedrich Global Research marketplace offering.