Brighthouse Financial Inc (BHF), Twitter Inc (TWTR): Why Billionaire David Einhorn Is Betting on These Stocks

With stock markets at record highs, hedge funds are struggling to keep up. While on average hedge funds underperform the market over the long run, the situation becomes more pronounced during bull runs. This, in turn, is reflected in the money that goes in and out of the hedge fund industry. According to FT, in 2016, hedge funds saw an outflow of capital of around $110 billion and withdrawals continued last year as well.

The lagging returns can be observed among big name funds, which are always in the spotlight and whose stock picks are constantly scrutinized by the investing community. Funds like Nelson Peltz’s Trian Fund Management, Bill Ackman’s Pershing Square and David Einhorn‘s Greenlight Capital have significantly underperformed the market last year. One of the reasons is their size, but some of their stock picks also played an important role.

For example, Trian, which gained 3.7% last year, has a very large position in General Electric Company (NYSE:GE), which was the worst-performing stock in the Dow Jones Industrial Average last year, having tanked by 45%. Pershing Square, which posted a loss of 4% for 2017, has a huge short bet against Herbalife Ltd. (NYSE:HLF), whose shares gained over 40% in 2017. Barry Rosenstein’s JANA Partners gained 5.6% last year, according to its fourth-quarter investor letter. Greenlight Capital, which we will discuss in more detail further in this article, has a basked of short positions in large tech companies, all of which advanced last year.

According to its fourth-quarter letter to investors, Greenlight Capital returned 1.6% in 2017, compared to the S&P 500’s gain of 21.8%. Since its inception in May 1996, the fund returned 15.4% annualized net of fees and expenses. The fund took a hit from its short “bubble basket”, which includes Amazon.com, Inc. (NASDAQ:AMZN), Tesla Inc (NASDAQ:TSLA), athenahealth, Inc (NASDAQ:ATHN), and Netflix, Inc. (NASDAQ:NFLX), all of which had a very strong performance last year. Another short bet that negatively affected Greenlight’s returns was Caterpillar Inc. (NYSE:CAT), whose stock surged on the back of a reduced cost structure and improved demand, which “led to a series of quarters that exceeded expectations.” However, Greenlight is still shorting the stock, believing that the current stock price reflects a rebound in sales and earnings that is unlikely to materialize. Another short position in the fund’s portfolio last year was Continental Resources, Inc. (NYSE:CLR), which appreciated following an increase in oil prices.

However, Greenlight also had a couple of winners on the long side of the portfolio and long positions is what we are interested the most. In their quarterly 13F filings, hedge funds disclose their long positions and we can use this data to identify market-beating opportunities even if the hedge fund overall is underperforming. At Insider Monkey, we use a proprietary methodology to identify the best stocks in the small-cap space that hedge funds are collectively bullish on. This strategy has has returned over 67% since its inception in 2014 and outperformed the S&P 500 ETF (SPY) by more than 20 percentage points. We share the stock picks that are part of our strategy in our premium newsletters (see more details here).

To understand better why it’s important to follow Einhorn and Greenlight Capital, we can take a look at the performance of the fund’s long positions. According to our calculations, which take into account the fund’s long positions in companies with a market cap of over $1.0 billion, Greenlight’s holdings returned nearly 42% during the 12-month period ended June 30.

Having said that, let’s take a closer look at some of the companies that Greenlight Capital discussed in its last letter to investors.

General Motors Company (NYSE:GM) was Greenlight’s largest winner last year and it was the fund’s largest position in 2017. However, General Motors Company (NYSE:GM)’s stock performed in line with the market as the company delivered excellent results. The investor believes that the automaker’s shares are still undervalued and considers that in 2018 it will deliver similar results. “The shares remain inexpensive at 7x consensus 2018 earnings estimates that we expect the company to exceed by a wide margin. This undervaluation is more extreme considering GM’s investment in future automobile technologies,” Greenlight said in its letter.

Greenlight also presented its case regarding several new positions initiated in 2017. The fund added Brighthouse Financial Inc (NASDAQ:BHF) to its equity portfolio during the third quarter and reported holding around 6.79 million shares worth $412.96 million at the end of September. Brighthouse Financial Inc (NASDAQ:BHF) went public in July and represents a spin-off of Metlife Inc (NYSE:MET)’s US retail business that sells annuities and life insurance.

“BHF appears to be a traditional spin-off – an underperforming and unloved part of a larger, more successful company. The tone of the spin-off road show was noticeably downbeat, with management advancing a business plan that does not sound particularly exciting for shareholders. Notably, despite very conservative capitalization and high risk-based capital levels, the base expectation calls for no capital return until 2020. The result is a valuation of just 56% of book value and 6.4x 2018 EPS estimates,” Greenlight said.

In this way, the fund believes that the market is too pessimistic regarding Brighthouse Financial Inc (NASDAQ:BHF) and that the stock has a lot of upside and the management is incentivized to help the growth.

During the fourth quarter, Greenlight also added two new companies to its portfolio. The fund repurchased a stake in Time Warner Inc (NYSE:TWX) when the stock fell following reports that the US government opposed the sale to AT&T Inc. (NYSE:T). Einhorn’s fund considers that the merger is likely to go through and even if it doesn’t, the stock was still cheap. Time Warner Inc (NYSE:TWX) still has strategic options to create value in case the merger is not completed. The company has strong earnings growth, especially at HBO, which is seeing higher subscription revenue growth. Moreover, Time Warner Inc (NYSE:TWX) has become under-levered after it suspended buybacks pending merger.

“TWX and Netflixnow have roughly the same enterprise value, despite TWX having a better library, an exciting content creation engine and substantial current profitability,” the fund said.

Twitter Inc (NYSE:TWTR) is another company in which Greenlight initiated a stake last quarter, albeit a small one. The fund is betting that in 2018 Twitter Inc (NYSE:TWTR) “will have a pitch to advertisers”, which should allow the company’s revenue to grow. Twitter Inc (NYSE:TWTR) has an enterprise value of about 2% of Facebook Inc (NASDAQ:FB), despite a big user base and broad reach. Moreover, Greenlight pointed out that the new management has improved the user experience, which “led to rapid growth in number of users and time spent on TWTR in 2017.”

Disclosure: none