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Why David Einhorn Underperformed the Market Despite Huge Gains in Apple Inc. (AAPL)

At Insider Monkey, we utilize a methodology that calculates fund’s returns based on a weighted average of the long positions it held at the end of the previous quarter in companies with a market cap of at least $1 billion. While this methodology is only a proxy for the fund’s actual returns, it does provide us a quick glimpse at the general performance of the fund’s portfolio well before most funds release their performance statistics (if they do at all). What our methodology found with David Einhorn’s Greenlight Capital is that its 37 qualifying long positions underperformed the market, returning just 0.6%, while the S&P 500 Index ETF (SPY) returned 0.9%.

David Einhorn

Einhorn’s methodological returns also fell well short of the first quarter returns of our own small-cap strategy, which returned 5.5% and enjoyed a particularly strong March, outperforming the SPY by 4.2 percentage points. In the 31 months now since we launched the small-cap strategy it has returned 137.4%, demolishing the gains of the SPY over the same period by more than 82 percentage points. What we found in our research (see the details) is what we see in Einhorn’s own performance: mid- and large-cap stocks that generally take up the largest positions in funds’ portfolios have a much poorer performance than their best collective small-cap picks. While Einhorn does boast a number of small-cap picks in his portfolio, the top ranked one is only his tenth largest position and accounts for just 2.68% of his portfolio. His top 9 meanwhile, consisting entirely of mid- and large-cap stocks, accounts for more than 58% of his portfolio, showing his heavy reliance on the performance of those stocks. No matter how good Einhorn is at picking small-cap stocks (and our research shows that fund managers collectively are very good indeed at picking them), his fund’s performance lives and dies on its larger-cap picks.

Einhorn’s underperformance also occurred despite a very strong quarter for Apple Inc. (NASDAQ:AAPL), which was his second largest position at the end of 2014. His stake of 8.61 million shares in the most valuable company in the world accounted for 12.62% of his portfolio’s value. Apple Inc. (NASDAQ:AAPL)’s stock rose more than 13% during the first quarter, to close it at $124.43, which was even a dip from its high of $133.00, and has analysts declaring now is the time to jump on Apple if you haven’t yet done so, given that it’s expected to announced both a dividend hike and an increased share repurchase program during its next earnings report, which could further improve shareholder value. Activist invetsor Carl Icahn, who has pushed for Apple Inc. (NASDAQ:AAPL) to improve shareholder value in such ways, remains the largest shareholder among the funds we track with ownership of 52.76 million shares at the end of 2014.

So where did things go wrong for Einhorn? It starts with his top pick Micron Technology, Inc. (NASDAQ:MU), which was battered during the quarter along with many other semiconductor stocks, sinking by 22.51% and crushing the returns of Einhorn and other major Micron Technology, Inc. (NASDAQ:MU) shareholders like billionaires Andreas Halvorsen and Seth Klarman. Einhorn had the largest  position of any investor in our database, of 31.26 million shares, accounting for 14.54% of his portfolio. Halvorsen and Klarman had 20.16 million and 19.71 million share positions respectively, though Halvorsen’s large position accounted for only 3% of his portfolio. Luckily for Klarman, he had slashed his position in Micron Technology, Inc. (NASDAQ:MU) by 62% during the fourth quarter, or the damage to his portfolio would’ve been even more devastating.  While Micron beat earnings estimates on April 1 when it reported its results for the fiscal 2015 second quarter, it also lowered guidance for the third quarter, which led to a drop in shares and a poor start to the second quarter.

The roller coaster ride continued for Einhorn with his next two picks, SunEdison Inc (NYSE:SUNE) and CONSOL Energy Inc. (NYSE:CNX). SunEdison enjoyed a great quarter, rewarding its many hedge fund backers in our database with whom it was by far the most popular solar stock. SunEdison Inc (NYSE:SUNE) soared by 23% during the quarter. CONSOL Energy Inc. (NYSE:CNX) on the other hand was an unfortunate pick, one in which Einhorn increased his position by 172% during the fourth quarter, perhaps anticipating an imminent turnaround in energy stocks. CONSOL Energy Inc. (NYSE:CNX) instead sank another 17.34% during the quarter. It was however one of the big gainers of the day on April 2, jumping by just under 5% for its backers, which were led by Southeastern Asset Management managed by billionaire Mason Hawkins, which has a 32.76 million share position. Einhorn’s 13.26 million share position is the second largest among funds in our database.

EMC Corporation (NYSE:EMC) was the only other position in Einhorn’s top 10 which had a large swing one way or the other, and it was a downward swing, as the stock fell by 13.65% during the quarter. EMC Corporation (NYSE:EMC) was his eighth-largest position consisting of 8.03 million shares, a position which was increased by 39% during the fourth quarter.

Disclosure: None

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