David Einhorn's Q2 2024 letter to Greenlight Capital investors, discussing his new position in Capri Holdings (NYSE:CPRI). See the full letter at the bottom of this post.
Dear Partner:
The Greenlight Capital funds (the “Partnerships”) returned 2.8%1 in the second quarter of 2024, net of fees and expenses, compared to 4.3% for the S&P 500 index.
The second quarter saw major stock market indices hit new all-time highs. Nevertheless, we wonder if this is a genuine bull market. For example, bull markets typically see lots of IPOs, yet the new issue market remains largely closed, despite a widespread understanding that private equity funds are looking for exits.
Looking deeper, we observe a peculiar relationship between the 20 largest market capitalization stocks in the S&P 500 index and the other 480 stocks. In an ‘ordinary’ bull market, a rising tide lifts all boats. Even in times when large stocks lead, smaller stocks usually also go up – just by a smaller amount.
In the most recent period, the correlation between these two groups of stocks has collapsed and even turned negative (thank you, Goldman Sachs, for creating this for us).
Maybe better experts of market structure can explain this.
Portfolio Contributors
In addition to gold, we had four material winners in our long portfolio this quarter:
- CONSOL Energy (NYSE:CEIX) recovered from $83.76 to $102.03. In the first quarter, CEIX was hindered by the Baltimore bridge collapse, which blocked the company’s exports for a few months. The harbor has now reopened and the market appears to have largely moved past the issue.
- HP Inc. (NYSE:HPQ) jumped from $30.22 to $35.02. After seven quarters of declines, PC sales turned marginally positive during the quarter. The industry appears to be in the early stages of an upcycle, perhaps to be enhanced by recently launched AI-enabled PCs that are expected to ramp up over the next several quarters.
- Kyndryl Holdings (NYSE:KD) rose from $21.76 to $26.31. The company had another good report, with results and guidance exceeding expectations on all key metrics. KD also pulled forward its target to achieve constant currency revenue growth, now starting in the fourth quarter of the current fiscal year.
- Solvay (EBR:SOLB) advanced from €25.30 to €32.87. While market participants ‘knew’ that soda ash prices would fall in 2024, the ramifications of falling prices don’t appear as dire as bearish analysts predicted. The company exceeded quarterly expectations and maintained its full-year outlook. Given the pervasive bearishness going into the announcement, perhaps that was good enough.
Portfolio Detractors
However, it wasn’t all roses. We had three material losers in the long portfolio (and an undisclosed loser in the short portfolio), and deservedly so:
- Alight (NYSE:ALIT) fell from $9.85 to $7.38. While the core business is quite steady with a high degree of recurring revenues, it underperformed slightly in the first quarter. Additionally, the smaller and lumpier parts of the business disappointed for the second quarter in a row. Management’s deteriorating credibility has compounded the issue and the situation has attracted an activist investor. We now expect the company to either change management or sell itself.
- Brighthouse Financial (NASDAQ:BHF) fell from $51.54 to $43.34. In successive quarters, BHF announced large, non-recurring and unexpected losses. This time, the company suffered a loss in a reinsurance arbitration that cost several hundred million dollars.
- ODP Corporation (NASDAQ:ODP) declined from $53.05 to $39.27. The quarterly results were disappointing with business-to-business sales declining 8% and adjusted operating profit cut in half. On the positive side, ODP finally announced that it intends to sell or exit Varis, its money-losing procurement and technology services platform, and as a result upgraded its earnings guidance. The company also replaced its Chairman who retired.
It was a slow period for new long positions. The only significant addition, which is actually a repurchase, was Capri Holdings (NYSE:CPRI). We’ve been reestablishing our position, and as of the end of the quarter our average entry price was $32.13 per share. As you may recall, we owned CPRI when the company announced it would be sold to Tapestry for $57 per share, and we rapidly exited our position at that time. Subsequently, the merger has been challenged by the Federal Trade Commission (FTC), which is suing to block the deal. The shares now trade at a substantial discount to the deal price. Upon review of the FTC complaint and the responses from CPRI and Tapestry, we believe the challenge is likely to be defeated in court later this year. Should the FTC prevail, however, we believe there is downside risk given CPRI’s dreadful results since the deal was announced. CPRI ended the quarter at $33.08.
Economic Predictions
Looking forward, it is hard not to think about the U.S. political situation and the upcoming presidential election. Discussing politics makes few friends, so we limit ourselves to a few observations.
From a market perspective, we don’t think it matters very much who wins. The economic policies of both parties are remarkably similar. Both favor large deficits despite a strong economy. We believe this supports our ongoing expectations of higher secular inflation in the coming years.
As for who will win the election, both parties seem to be doing their very best to lose it.
Portfolio Exits
We exited a few positions during the quarter, including:
- Buzzi SpA (BIT:BZU): It was long, grinding and painful during our 9-year holding period of this Italian cement manufacturer. The company kept performing and the shares kept derating. Eventually, it became absurd enough that the shares simply couldn’t keep derating and almost tripled over the final year and a half of our investment. We traded it well and wound up with a nice 15% IRR.
- First Citizens BancShares (NASDAQ:FCNCA): The bargain acquisition of the corpse of Silicon Valley Bank worked out well. The shares appreciated more than 80% and no longer appear cheap.
- Gulfport Energy (NYSE:GPOR): During our 4-year holding period, the company successfully reorganized and emerged from bankruptcy with a clean balance sheet. The company executed successfully and we exited with a 62% IRR.
- NET Power (NYSE:NPWR): We exited with a small gain. The path for the company from here to future profits appears to be more distant and risk fraught than we initially anticipated. Under the circumstances, not losing money on this investment feels like a win.
- Onex Corporation (TSE:ONEX): The Canadian alternative asset manager’s shares appreciated 59% and no longer trade at an exciting discount.
- We also exited our short position on December SOFR futures with a large gain. The price reached the point where we no longer believed we had a differentiated view about the future course of the Federal Reserve’s interest rate decisions in 2024.
At quarter-end, the largest disclosed long positions in the Partnerships were Brighthouse Financial, CONSOL Energy, Green Brick Partners, HP and Solvay. The Partnerships had an average exposure of 95% long and 52% short.
“Buy land AJ, cause God ain’t making any more of it.” – Tony Soprano
Best Regards,
Greenlight Capital
Read the full letter here or see more hedge fund letters here.