Highlights From Greenlight Capital’s 2015 Q1 Investor Letter

We have obtained a copy of Greenlight Capital‘s 2015 Q1 investor letter. David Einhorn (Investor Letters, Stock Picks) is one of the most credible hedge fund managers whose investor letters are sought after. Micron Technology, Inc. (NASDAQ:MU) was the biggest position in Greenlight Capital’s 13F portfolio at the beginning of the first quarter, but Einhorn decided to start his investor letter by talking about its second and third biggest positions, Apple Inc. (NASDAQ:AAPL) and Sunedison Inc (NYSE:SUNE). Here is what Einhorn said about Apple:

“AAPL shares advanced 13%, as the iPhone 6 has proved to be a blockbuster that drove the company to 30% revenue growth and 48% EPS growth in the December quarter. AAPL also announced the April launch of the Apple Watch, its first new product category in five years. While we have modest expectations for Apple Watch and don’t expect AAPL to maintain this level of growth, the market expects even less, as it continues to value AAPL shares at a discounted valuation. We believe that AAPL is a superior company that merits a premium multiple.”

David Einhorn initiated a position in Apple Inc. (NASDAQ:AAPL) exactly five years ago when the stock was trading at less than a third of today’s valuation. Let’s refresh your memories about what Einhorn said about Apple when he initiated that position:

“Apple Inc. (AAPL) is one of the world’s most successful and innovative technology companies.  Over the last few years, the company has transitioned from a niche PC hardware and software provider into a more diversified company with market leadership positions in mobile communications and portable entertainment via its iPod, iPhone, and iPad products and the iTunes service.  From 2004 to 2010 revenues have grown about 700% or almost 40% per year.  Earnings have grown even faster from $0.38 to an estimated $14.00 per share.  AAPL has a fortress balance sheet with more than $40 per share in cash and investments.  During the recent downturn, the Partnerships established a position at an average price of $248.09 per share, representing 15x this year’s estimated earnings net of cash.  While growth over the next few years will certainly be slower than it has been over the last few years, AAPL does not appear to have fully penetrated its market opportunities.  Accordingly, the opportunity to invest in this leading company (with a better financial profile than market participants seem to acknowledge) appears iTtractive at its current multiple. AAPL shares ended the quarter at $251.53 each.”

Sunedison Inc (NYSE:SUNE)’s contribution to Greenlight Capital’s performance was as much as Apple’s contribution. Einhorn had nearly $1 billion invested in Apple at the beginning of the first quarter, whereas his SunEdison position was slightly more than half of that. Here is what Einhorn said about SunEdison:

“SUNE shares rallied 23% during the quarter. At the analyst day in February, the company said that it would begin generating significant free cash flow sooner than the market had anticipated, and expected to exit 2016 at a run rate of $3 of cash EPS. The strong outlook was driven by rapid growth in dividends received from Terraform Power (TERP), the company’s renewable energy-focused affiliate, and a consequent acceleration in the timing of incentive distribution rights which SUNE expects to receive as TERP’s sponsor.”

Einhorn initiated a position in Sunedison Inc (NYSE:SUNE) during the first quarter of 2014. Here is what he said in the 2014 Q1 investor letter:

“SUNE, formerly known as MEMC, is a developer of solar power plants for business and utilities. The declining cost of solar energy combined with the rising cost of conventionally produced electricity should position SUNE power as a winner. The company has built a large pipeline of attractive projects secured by credit-worthy buyers of electricity. Until recently, the good business was mixed in with two bad ones: manufacturing wafers for semiconductor companies, and assembling commodity solar modules for developers. Historically, the company’s poor balance sheet forced it to sell many of its solar development projects at discounted prices to raise capital.

The company has now exited the solar module assembly business and is in the process of monetizing its semiconductor wafer business through an IPO. Later this year, we expect the company will IPO a newly-created Yieldco, which will house its most attractive solar projects rather than selling them to third parties. NRG Yield Inc. is a comparable company that trades at 12x EBITDA and has a 3% dividend yield. Were Yieldco to trade at 9x EBITDA and a 5% dividend yield it would imply a value for the solar business of ~$34 per share. SUNE expects to run its development business close to breakeven in future periods. Adding in the value of the soon-to-be IPO’ed semiconductor business and subtracting a modest amount of corporate net debt would suggest a sum of the parts value for SUNE of ~35 per share. Our average entry price is $15.55 and SUNE shares ended the quarter at $18.84.”

Last October David Einhorn shared his updated thesis at the Robin Hood Conference. He reduced his price target to $32 but Sunedison Inc (NYSE:SUNE) was trading at half of that level when he was preparing his presentation. A complete copy of this presentation can be downloaded here.

We mentioned that the biggest position in Greenlight Capital’s portfolio at the beginning of this year was Micron Technology, Inc. (NASDAQ:MU). The long/short hedge fund had $1.1 billion invested in this stock and the losses from it exceeded a quarter of a billion dollars if it hadn’t trimmed its position. Here is what Einhorn said about this position:

“We had one significant loser during the quarter. Micron Technology (MU) shares declined 23%. Weak PC sales drove a shortfall in DRAM demand leading to lower prices and reduced earnings. Our thesis is that the consolidated DRAM industry will act more rationally in the face of slower demand, moderating future cyclical declines and leading to higher profitability through the cycle. The current downturn is the first opportunity to test this thinking: either the industry will overproduce, fight for share, and kill profitability, or it will respond sensibly to slower cyclical demand and merit an upward revaluation. While we are watching industry behavior very closely, we believe our thesis is intact.”

Value investor Seth Klarman probably sensed the trouble ahead and cut his Micron Technology, Inc. (NASDAQ:MU) holdings by 62% during the fourth quarter. Klarman still had $700 million invested in the stock at the beginning of this year. Micron Technology, Inc. (NASDAQ:MU) shares have recovered around 4% since the end of the first quarter. However, it remains to be seen whether Einhorn is right about the stock.

The second part of this article can be read here.

Disclosure: Long SUNE.