October 24, 2013

The latest trades from David Einhorn

The founder of hedge fund Greenlight Capital, David Einhorn, became famous in 2008 when he predicted the fall of Lehman Brothers. When we talked about him in the article David Einhorn - He who predicted the fall of Lehman Brothers in 2008, he was negative to the credit rating agencies, he was positive to gold, and he was negative to the Japanese debt mountain.

One may first suspect that David Einhorn has made a few bad trades since he's driving a Honda Odyssey, but in 2013, his net worth was reported to be $1.25 billion. He's still working at Greenlight Capital. Their strategy is to be both long and short, and according to their latest report, the average distribution between the positions looked like this: 109 percent long and 72 percent short.

The hedge fund's major short position is the company Green Mountain Coffee Roasters ($GMCR), which sells coffee and coffee machines. The short was actually announced by Greenlight Capital in 2011, and was according to the chart below a profitable trade. I don't know exactly what has happened since then, but in the Q3 2013 report from Greenlight Capital, they've added to their short position of GMCR. The report discusses the company, but this line drew my attention as a particularly suspicious behavior of GMCR:
Three years ago, GMCR stopped disclosing the number of K-Cups sold, which is comparable to Ford not disclosing the number of cars and trucks it sells.

Green Mountain Coffee Roasters Stock Price

Greenlight Capital are not only shorting stocks, they are also buying stocks. Their largest position, with 18 percent of the hedge fund, is Apple ($AAPL). They bought Apple shares for the first time in 1999 for $14 per share and sold their investment in 2000 for $18 per share. It was in hindsight not the best decision, so when they decided to invest in Apple again, they had to pay a considerable higher price.
It looks like it [ iPhone 5s] will be a hit, and we believe that AAPL will find novel ways to use Touch ID and iBeacon to monetize its user base and ecosystem via new service offerings and apps. AAPL's current non-hardware e-commerce business (sales from iTunes, App Store and iBook Store, plus software and services) is $16 billion a year and growing. Not only is it growing faster than Amazon, AAPL makes more money in non-hardware e-commerce alone than Amazon makes in its entire business. That gap will likely widen in AAPL's favor as AAPL rolls out new offerings and services. We believe that near-term share performance will track the success of the new phones, while the longer-term share price will reflect the market's eventual understanding of AAPL's strong ability to earn high-margin and recurring revenue streams.  

Apple Stock Price

According to Greenlight Capital's report, they argue how the stock market has become expensive and a bubble may be forming. The S&P 500 index is no longer cheap, particularly considering that we are now almost half a decade into an economic expansion and earnings growth is unexciting. There's also evidence of much more (and increasingly creative) speculative behavior since a number of investors have begun to value their investments by using non-conventionally methods. David Einhorn draw parallels to the internet bubble where it was difficult to make money from short positions as the bubble grew, so Greenlight Capital has avoided being short these non-conventionally valued stocks.
Some companies have convinced the market to embrace earnings reports that ignore what they must pay employees to show up to work every day, provided the employees accept equity rather than cash. Then there's the sizable group of companies (including a number of recent IPOs) that are apparently not subject to conventional valuation methods. Many have no profits and no real plan to make future profits. Finally, there are the market participants whose investment process appears to be "bet on whatever has made money most recently." They've noticed that stocks with large short-interest ratios have materially outperformed over the last year and they continue to invest accordingly. When "high short interest" becomes a viable stock-picking strategy and conventional valuation methods no longer apply for many stocks, we can't help but feel a sense of déjà vu.

Other long positions include: