Billionaire David Einhorn‘s Greenlight Capital has just released its third-quarter investor letter, in which the fund dished out commentary on three of its most prominent short positions, in Amazon.com, Inc. (NASDAQ:AMZN), Tesla Motors Inc (NASDAQ:TSLA), and Netflix, Inc. (NASDAQ:NFLX), a collection of shorts it calls its “bubble” shorts.
– Download a copy of Greenlight’s Q3 Investor Letter from this page.
Greenlight had a much-needed bit of success in the third-quarter, as the fund returned 6.2% net of fees, beating the S&P 500 by 1.7 percentage points. That also pushed its returns into positive territory for the year, at 3.3%, which nonetheless trails the market by nearly 11 percentage points.
In its latest quarterly investor letter, the fund lamented the fact that value investing remains challenging in the current market, as growth stocks continue to outperform value stocks. Greenlight also questioned (perhaps somewhat rhetorically, though tinged with a sense of dread) whether the market would ever return to valuing equities based on the fundamentals that the fund itself uses to value equities and thereby find opportunities to buy undervalued stocks in accordance with those fundamentals.
When looking at its three bubble shorts, Greenlight believes that a different paradigm of valuing stocks is in play, perhaps permanently, whereby equities are seen as being more valuable (and thus become more valuable) if they have the ability to be disruptive and innovative, as opposed to the niggling details of their financial performance.
Greenlight first looked at the third-quarter performance of Amazon.com, Inc. (NASDAQ:AMZN), which lost 1% during the period. Greenlight believes the losses were strangely muted, considering the huge declines in consensus earnings estimates over the next five years that resulted from the company revealing a long-term outlook of weaker profitability. Greenlight suggested that such a dramatic reassessment in the long-term results of a “nosebleed” stock like Amazon.com, Inc. (NASDAQ:AMZN)’s would typically lead to a huge correction in the stock price, which didn’t happen.
Moving on to Tesla Motors Inc (NASDAQ:TSLA), while the electric automaker’s shares did lose 6% during the third-quarter, Greenlight felt they deserved a much harsher fate, considering the “awful” quarter the company had in terms of both its current performance and its future outlook. The fund cited weak demand for Tesla’s legacy vehicles and the various challenges the company has faced as it tries to ramp up production of the Model 3 as just some of the pitfalls that it fell prey to in Q3. The fund even suggested that Tesla Motors Inc (NASDAQ:TSLA)’s presumed lead over other automakers in terms of autonomous driving may simply be due to its willingness to rush inadequately tested and possibly dangerous software and vehicles to the masses in an effort to be first to market with the technology.
On the second page of this article, we’ll take a look at Greenlight’s thoughts on Netflix, Inc. (NASDAQ:NFLX), General Motors Company (NYSE:GM), and CONSOL Energy Inc. (NYSE:CNX).
Netflix, Inc. (NASDAQ:NFLX) had a big quarter, gaining 21% thanks to beating quarterly expectations, but Greenlight remains convinced that the company is burning way too much cash, taking umbrage with CEO Reed Hastings’ second-quarter suggestion that negative free cash flow could actually be seen as a sign of enormous success for the company.
Netflix is off to a strong start to the fourth-quarter as well, as the company delivered strong quarterly results, which lead to several analysts hiking their price targets on the stock. Analysts believe that Netflix’s latest subscription price hike will have little impact on its low churn rate, and that it continues to distance itself from competitors with its growing library of original content.
Greenlight next discussed two of its best performing stocks during the third-quarter, which were General Motors Company (NYSE:GM) and CONSOL Energy Inc. (NYSE:CNX). While Greenlight was involved in a proxy contest with GM that was bitter at times, a fight which it ended up losing, it nonetheless remains a firm believer in the company, for which it’s been greatly rewarded during the past two months.
While Greenlight praised the company for unloading its European division and for positioning itself well for the coming Auto 2.0 revolution, it couldn’t help but note that the company issued $1 billion in perpetual preferred stock with a yield of 5.25%, which would’ve made its proxy proposal even more attractive. The company had claimed that such stock would yield in the double digits, which was one of its main points of contention against Greenlight’s Dividend Shares proposal.
Lastly, shares of CONSOL Energy Inc. (NYSE:CNX) rebounded in the third-quarter, though they remained down year-to-date, and have fallen again in the fourth-quarter. Greenlight expressed surprise that CONSOL Energy’s shares haven’t enjoyed a strong revaluation as the date nears for the company to separate its coal and natural gas businesses. Nonetheless, it remains convinced that the market will eventually reward the company’s shareholders with notable gains once it revalues the company in its current (at that time) form.