Hedge fund letters to investors are always an interesting and insightful read especially for those that follow hedge funds as part of their investment strategy. Usually, the only way to emulate a hedge fund’s portfolio is to simply look at its 13F and then to try and identify its most profitable bets by diving into each company in more detail. At Insider Monkey we take a different approach at imitating hedge funds by taking a group of funds with the best-performing picks and then finding the stocks that they are collectively bullish on. This approach has proven profitable as our flagship hedge fund strategy is up by 94% since its inception in May 2014. But if you take individual funds and look at their picks, it involves more work because often their portfolios are pretty big. In this way, hedge fund letters can be useful because often investors discuss some of their positions and provide their opinion regarding the stock and the company’s future.
Sometimes it’s also useful to go back and see what an investor has said about some stocks and whether or not those predictions came true or are at least close to becoming true. For example, a fund holds a large bet for a couple of years and during this time the stock might have already gained a lot of ground and is trading close to the investor’s target. Other times, a fund might have been wrong on a lot of its investments, so it’s probably not a good idea to follow it at all. With this in mind, we have selected a bunch of stocks from billionaire David Einhorn‘s Greenlight Capital‘s letters between 2015 and 2016, in which the fund is still invested or sold its stake in the last reported quarter.
David Einhorn is one of the most well-known value investors on the Street. His Greenlight Capital fund returned 2,134% cumulative or 15.4% annualized since its inception in 1996 through the end of 2017. Lately the fund has been struggling alongside many other value investors, amid a prolonged economic cycle and the bulk of the market focusing on riskier growth and momentum stocks. Nevertheless, many analysts and investors expect the trend to break soon and value investment to come back. In the meantime, in the first quarter of 2018, Einhorn’s fund lost 13.6% net of fees and expenses according to Greenlight Capital Investor Letter 2018 Q1, which marked the fifth quarter since inception when the fund suffered a loss of more than 5%.
Despite the unfavorable environment, Einhorn stuck to his strategy. Among Greenlight’s 10 largest holdings from the last 13F fiiling with the SEC, only three companies were added in 2017, the rest of the positions being at least two years old. It’s largest holding, General Motors Company (NYSE:GM), has been in the fund’s portfolio since the first quarter of 2015, when the fund acquired around 355,000 shares. Over the years, the stake was increased and at the end of March, the fund held 22.61 million shares of General Motors, down by 12% over the quarter. In its 2015 Q1 letter, Einhorn said that they went back into GM after having held shares for three years until 2014. The position was acquired at $34.26 apiece and Einhorn was betting on low raw material costs, profitability of SUVs and light trucks amid low gas prices and the elimination of losses in Europe.
“[…] GM has acknowledged it might not need quite so much cash lying around earning zero interest, and it will begin to buy back shares shortly. While GM also trades at less than 8x 2015 consensus estimates of $4.63 per share, we believe there is an excellent chance that GM can beat those expectations,” Greenlight’s letter added.
Since Greenlight bought its first shares in 2015, the stock has gained 31%. General Motors Company (NYSE:GM) is seeing strong sales of SUVs, crossovers and trucks. In March of 2018, a number of models, including Chevrolet Trax, Equinox, and Traverse, Buick Envision, and GMC Acadia saw the best March sales ever, while Buick Encore and GMC Terrain saw best month overall. Chevrolet, Buick, and GMC crossovers saw sales up by 28%, 17%, and 21% on the year in the first quarter. Pick-up sales were up by 2% last quarter, while large SUV sales were in line over the year.
In its latest letter to investors, Greenlight reiterated its positive view of General Motors Company, saying that they see favorable fundamentals with strong employment and tax cuts helping customers.
“GM has lean inventory and a product line-up that is gaining share with pricing power. We just don’t see what the market may be saying, and we believe that GM is more likely to exceed near and intermediate-term forecasts than to disappoint.”
Then there’s AerCap Holdings N.V. (NYSE:AER), which has been in Greenlight’s portfolio since the second quarter of 2014. In its letter to investors for the first quarter of 2015, Greenlight said they had bought their stake at $41.02, so they have seen the shares gain 33%. Here’s what Einhorn said about AerCap Holdings N.V. (NYSE:AER):
“Last year, it bought AIG’s aircraft leasing business (ILFC) at a bargain price in an extremely accretive deal, taking AER’s total fleet from around 300 planes to more than 1,300. The combined business will benefit from AER’s lower tax rate and funding costs, as well as SG&A and operating efficiencies. The deal also provided AER with ILFC’s attractivelypriced order book of next-generation planes. We bought our position at an average price of $41.02, which is less than 8x this year’s expected earnings. AER’s management is well incentivized, with senior executives receiving new restricted stock units in the ILFC deal, two-thirds of which will vest only after hitting performance targets. The company has been well managed and appears poised to grow earnings at a double-digit clip for the next several years.”
In 2017, AerCap Holdings N.V. (NYSE:AER) saw its net income inch up by just 3% to $1.08 billion, although EPS went up by 16% to $6.43 due to stock buybacks. The stock is trading at just 8.60 times forward earnings.
In Chemours Co (NYSE:CC), David Einhorn’s fund exited its stake during the first quarter of 2018 at a huge profit. The position was added during the last three months of 2015, several months after Chemours Co (NYSE:CC) went public after DuPont spun off its titanium dioxide and fluoroproducts businesses. The stock slid following the IPO hitting a low of $3 in January 2016, but Greenlight was betting that TiO2 prices would recover.
“We began buying in Q4 2015, believing that TiO2 prices were at or near the bottom. As the market caught up to our thinking, the shares began a rapid recovery, and we held an incomplete position. In June, a short recommendation achieved widespread publicity and caused the shares to temporarily retreat, enabling us to complete purchasing our stake at attractive prices. […] CC should benefit from the continued recovery of TiO2 prices. Further, EU regulations are driving adoption of CC’s next-generation refrigerant Opteon, which should increase fluoroproducts profits. Lastly, management can reduce costs and shutter unprofitable businesses now that the company is independent of DuPont. We expect the stock to appreciate as investors refocus on the earnings power of the business, which we think will approach $2.00 in 2017.”
Greenlight’s average purchase price for Chemours Co (NYSE:CC) between the fourth quarter of 2015 and the second quarter of 2016 was $6.58. In its letter for the first quarter of 2018, Greenlight said they exited the position at $31.62 per share, having unloaded 1.05 million shares.