David Einhorn’s Greenlight Capital returned 15.9% in 2010, and 21.5% since its inception in 1996. It is one of the hedge funds we follow very closely. We occasionally imitate some of their positions. David Einhorn is a bit cautious about the medium term. He believes the government is busy sweeping problems under the rug rather than solve them. Einhorn thinks this will come back to haunt us in the future. He mostly invests in United States and Europe, but doesn’t make any currency bets. As an inflation protection, he has been holding significant amounts of physical gold for more than two years now. Those early gold bets earned him more than 50% over the past two years. (You can read more about David Einhorn in his book Fooling Some of the People All of the Time)
David Einhorn maintains a defensive posture. Greenlight had an average exposure to equities and fixed income of 101% long and 75% short during the fourth quarter of 2010. As a result, it has a low correlation with the market and is much less volatile than the market is, yet Greenlight Capital managed to beat the market in 2010. Greenlight’s largest long positions at the end of December were Arkema, Ensco, gold, Pfizer, and Vodafone Group. In its latest 13F, they didn’t have to report Arkema, gold, and Vodafone positions. Greenlight recently purchased 2.1 million shares of State Bank Financial Corp (STBZ.PK), but it also isn’t required to report transactions of OTC stocks. So 13Fs provide an incomplete glimpse into his portfolio. (Einhorn didn’t have to disclose his favourite pick for 2011 either)
During the fourth quarter Greenlight’s biggest new purchases were Sprint Nextel (S) and British Petroleum (BP). David Einhorn believes Sprint is finally turning around and has a significant margin expansion opportunity. But more importantly, Greenlight sees Sprint as a spectrum play. “We think S’ uniquely large spectrum position through its direct holdings and via its interest in Clearwire is a valuable competitive advantage in an industry where spectrum is becoming a scarce resource. We value S at a discounted cash flow value of over $10 per share if management delivers on its targeted savings from network modernization,” Einhorn said in his latest investor letter. Greenlight paid an average price of $4.46 per share for Sprint. Sprint closed at $4.46 yesterday.
Greenlight also purchased 3.33 million shares of BP at an average price of $41.18 per share. This is what Greenlight said about this investment:
“The Deepwater Horizon oil spill in April 2010 caused a significant decline in BP’s share price. BP has reserved nearly $40 billion pre-tax to account for costs related to this accident and has thus far sold $22 billion of non-core assets (with a stated target of up to $30 billion in divestitures), leaving the balance sheet in excellent shape. Pro forma for these asset sales and after taking into account our estimate of BP’s eventual oil spill related expenses, we expect BP will still be able to earn nearly $20 billion per year from continuing operations. At less than 7x pro forma earnings, we purchased BP at a 25% discount to its peers. The company is well positioned to reinstate a dividend in early 2011 and generate higher production growth with its high-grade asset base.”
Whitney Tilson is also extremely bullish about BP. Here’s the performance scorecard for Greenlight’s new stock picks:
Company Ticker Return Value (Millions) CARDINAL HEALTH INC CAH 9.6% 406 SPRINT NEXTEL CORP S 7.6% 236 MARKET VECTORS ETF TR GDX -8.2% 218 BECTON DICKINSON & CO BDX -3.5% 163 BP PLC BP 6.7% 147 LYONDELLBASELL INDUSTRIES LYB 8.7% 89 POTASH CORP SASK INC POT 22.7% 59 SEMGROUP CORP SEMG 6.5% 52 INGRAM MICRO INC IM 4.0% 49 FLAGSTAR BANCORP INC FBC 4.9% 3 CAPITOL FED FINL CFFN 3.0% 1 These stocks had a weighted average return of 4.8%, underperforming the SPY by 1.3 percentage points. Cardinal isn’t a new position but Einhorn increased his holdings by more than 60% and made CAH one of his large holdings. Einhorn also increased his Gold Miners ETF (GDX) by 37%. The Ingram Micro position was also increased by 44%. Warren Buffett sold all of his Becton Dickinson (BDX) holdings, but Einhorn was adding to his holdings. LyondellBasell is a very popular stock among hedge fund managers. Daniel Loeb’s Third Point, Tom Steyer’s Farallon Capital, and Andreas Halvorsen’s Viking Global are among the hedge funds with LYB positions. Potash is even more popular than LYB. In addition to all the three hedge funds mentioned in the previous sentence, Jim Simons’ Renaissance, Richard Perry’s Perry Capital, and Mohnish Pabrai also own Potash. Actually Potash (POT) and CF Industries are two of the top 10 stocks hedge funds own the most of.
David Einhorn’s top positions in his 13F portfolio performed slightly better than his new stock picks. These top 25 picks returned 5.8% since the end of December, vs. SPY’s 6.1% return. Here is how each stock performed so far this year:
Company Ticker Return Value (Millions) ENSCO PLC ESV 1.2% 481 CARDINAL HEALTH INC CAH 9.6% 406 PFIZER INC PFE 9.9% 405 CIT GROUP INC CIT 2.2% 346 CAREFUSION CORP CFN 7.3% 344 APPLE INC AAPL 11.4% 270 SPRINT NEXTEL CORP S 7.6% 236 MARKET VECTORS ETF TR GDX -8.2% 218 MICROSOFT CORP MSFT -2.4% 215 NCR CORP NEW NCR 26.1% 176 BECTON DICKINSON & CO BDX -3.5% 163 XEROX CORP XRX -4.3% 156 MI DEVS INC MIM 2.8% 153 EINSTEIN NOAH REST GROUP INC BAGL 17.9% 151 BP PLC BP 6.7% 147 travellers COMPANIES INC TRV 5.6% 119 ASPEN INSURANCE HOLDINGS LTD AHL 3.2% 118 LYONDELLBASELL INDUSTRIES N LYB 8.7% 89 NVR INC NVR 9.3% 86 EVEREST RE GROUP LTD RE 3.5% 83 HEALTH MGMT ASSOC INC NEW HMA 1.3% 62 TRANSATLANTIC HLDGS INC TRH 0.4% 62 HEALTH NET INC HNT 13.6% 62 POTASH CORP SASK INC POT 22.7% 59 BROADRIDGE FINL SOLUTIONS IN BR 4.3% 58Jonathan Auerbach’s Hound Partners and Curtis Schenker’s Scoggin have Ensco Plc (ESV) in their portfolios as well. Roberto Mignone’s Bridger Management is the only other hedge fund with a large Cardinal Health position in its portfolio. David Tepper’s Appaloosa and Lee Ainslie’s Maverick Capital are among the hedge funds with Pfizer (PFE) positions. Even though 13F forms do not have a hedge fund’s entire portfolio, for most hedge funds it provides valuable hints about that fund’s performance. David Einhorn didn’t have a great start to 2011 for several reasons. First, he had a defensive posture with a very small net long exposure. Second, his long positions didn’t beat the market by a large margin to compensate for his small beta exposure. Third, his gold investments lost value so far in 2011. However, David Einhorn has usually found a way to deliver superior risk adjusted returns under various market conditions. He is a better analyst than most fund managers, so we will keep following him.