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David Einhorn Is Bullish On This Newly Listed MLP

David Einhorn‘s Greenlight Capital has disclosed a stake of 3.25 million shares in the newly listed CNX Coal Resources LP (NYSE:CNXC). The holding, which was acquired through both a private placement on July 7 and open market purchases, represents about 28% of the company’s outstanding shares. CNX Coal Resources LP (NYSE:CNXC) is a master limited partnership formed by CONSOL Energy Inc. (NYSE:CNX), a Fortune 500 producer of coal and natural gas, in which Einhorn holds a significant stake as well, amounting to some 20.58 million shares valued at $574.06 million and representing almost 9% of the company’s outstanding shares.

David Einhorn

Einhorn is one of the most successful money managers of the past decade. He learnt the art of investing from Gary Siegler and Peter Collery, managers of the SC Fundamental Value Fund. He launched Greenlight Capital in 1996 and the fund currently has about $12.3 billion worth of regulatory assets under its management.

David Einhorn
David Einhorn
Greenlight Capital

A quick word on why we track hedge fund activity. In 2014, equity hedge funds returned just 1.4%. In 2013, that figure was 11.3%, and in 2012, they returned just 4.8%. These are embarrassingly low figures compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean that hedge fund managers are dumber than a bucket of rocks when it comes to picking stocks? The answer is definitely no. Our small-cap hedge fund strategy, which identifies the best small-cap stock picks of the best hedge fund managers returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012, outperforming the market each year (it’s outperforming it so far in 2015 too). What’s the reason for this discrepancy you may ask? The reason is simple: size. Hedge funds have gotten so large, they have to allocate the majority of their money into large-cap liquid stocks that are more efficiently priced. They are like mutual funds now. Consider Ray Dalio’s Bridgewater Associates, the largest in the industry with about $165 billion in AUM. It can’t allocate too much money into a small-cap stock as merely obtaining 2% exposure would really move the price. In fact, Dalio can’t even obtain 2% exposure to many small-cap stocks, even if he essentially owned the entire company, as they’re simply too small (or rather, his fund is too big). This is where we come in. Our research has shown that it is actually hedge funds’ small-cap picks that are their best performing ones and we have consistently identified the best picks of the best managers, returning 135% since the launch of our small-cap strategy compared to less than 55% for the S&P 500 (see the details).

CNX Coal Resources LP (NYSE:CNXC)’s IPO raised less equity than was earlier announced by the company. While the initial plan was to sell 10 million units between the price of $19 to $21 per unit, the final offering came at $15 per unit with 8 million units offered. Greenlight acquired the remaining 2 million units at $15 per share in the private placement. CNX Coal Resources LP (NYSE:CNXC)’s assets include a 20% undivided interest in CONSOL Energy’s Pennsylvania mining complex. Although the company plans to acquire the remaining 80% of the facility in the future in order to increase payouts to its shareholders, it is under no obligation to do so. Moreover, the mining complex generates the highest margins among its peers in the eastern United States. The average cash margin for the last fiscal year stood at $25.27 per ton, compared to an average of $14.41 for the other coal master limited partnerships. Based on the current production capacity, CNX can support over 27 years of production without developing new shafts for accessing coal seams.

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