David Einhorn’s Greenlight Capital was finally getting some breaks this year. During the third quarter the stocks he has been shorting went down 20%. Einhorn reduced his net exposure to 23% going into the dreadful third quarter and managed not to lose money in a market where S&P 500 index lost 14%. He increased his net exposure to 33% at the end of September which helped Greenlight Capital to generate 7.8% returns in October. This pulled the fund into black YTD.
Einhorn also benefited from his short position in Green Mountain (GMCR). The stock lost more than a third of its value after Einhorn’s GMCR presentation at the Value Investing Congress. Natural disasters also helped Einhorn in October. Einhorn had 11.5 million shares of Seagate in his portfolio at the end of June. The stock was trading at $9.49 at the beginning of October. A flooding in Thailand shut down rival Western Digital’s (WDC) facilities whereas the damage was minimal at Seagate’s facilities in the same country. Seagate gained $7 or more than 75% during the past month, mostly thanks to the act of God.
Einhorn also made some significant changes in his portfolio. He has been a long-time favorite of gold bullion, but recently shifted some of his holdings to gold miners instead. He doesn’t know which ones are the best miners, so he decided to invest in the Gold Miners ETF (GDX). David Einhorn also sold off his holdings in cyclical European stocks ahead of the huge drop in third quarter. Einhorn also had a change of heart about Pfizer which was his largest position 4 months ago. Here is what Einhorn said yesterday about his recent portfolio activities:
Our long portfolio lost a bit more than the market in the third quarter. However, our short portfolio generated an absolute portfolio return of about 12% on an average short exposure of 60%, reversing more than all the loss in the short book during the first half of the year. Our macro hedges also helped in the quarter with slight positive returns coming from gold and our European sovereign and CDS positions, where we’ve taken some profits.
As the market retreated over the past few months, we added to a few of our existing long positions, found a few new investment opportunities primarily in the technology and auto sectors, and covered several shorts. We also exited a long-standing position in Pfizer profitability as better opportunities presented themselves.
During the third quarter, we shifted a portion of our gold investment from physical gold into GDX and ETF gold mining companies. Throughout the course of this year, a substantial disconnect has developed between the price of gold and the mining companies. With gold at today’s price, the mining companies have the potential to generate double-digit free cash flow returns and offer attractive risk adjusted returns even if gold does not advance further. Of course, since we believe gold will continue to rise, we expect gold stocks to do even better.
Greenlight Capital’s YTD 2011 returns are 1.3% through the end of October.