David Einhorn’s Q3 2023 letter to Greenlight Capital investors, discussing his positions in CONSOL Energy (NYSE:CEIX), Capri Holdings (NYSE:CPRI), Black Knight (NYSE:BKI) and Green Brick Partners (NYSE:GRBK). Full letter here.
Dear Partner:
The Greenlight Capital funds (the “Partnerships”) returned 12.9%1 in the third quarter of 2023, net of fees and expenses, and 27.7% for the first nine months of 2023, net of fees and expenses, compared to a -3.3% return and a 13.1% return for the S&P 500 index, respectively.
It was a strong quarter for the Partnerships across the board. Despite broad market declines, we had substantial gains in our long portfolio. Our short portfolio declined a bit more than the market, and we also had a materially positive contribution from macro.
The material winners were CONSOL Energy (CEIX), Capri Holdings (CPRI), Black Knight (BKI), our short ‘Innovation’ basket, and a macro position that benefitted from both declining stock prices and higher long-term interest rates. Green Brick Partners (GRBK) was our only material loser during the quarter.
CONSOL Energy
CEIX shares advanced from $67.81 to $104.91 during the quarter, despite no obvious fundamental developments. It was a favorable period for energy stocks (more on that below), and CEIX abandoned its dividend in order to increase its share repurchases. With earnings expected to be over $21 per share in 2023, it is proving to be a challenge for the stock to maintain such a measly P/E multiple in the face of such a large buyback. One can make a great return when a P/E multiple expands from 3x to 5x… might 8x be too much to hope for?
Capri Holdings
In August, CPRI agreed to be sold to Tapestry for $57 per share and we promptly exited the position. Beginning with the 2022 holiday season, CPRI’s fundamentals turned increasingly negative and the company has since announced a string of earnings disappointments. When CPRI released poor fiscal year-end results in May, but insisted on maintaining overly optimistic guidance, we considered selling in frustration. With a forward bar that was set too high, we believed that further disappointments were likely. There was much hand wringing amongst investors and analysts about the earnings guidance of $6.40 per share. With the stock in the low $30s, why not lower the bar?
Black Knight
As we expected, BKI completed its sale to Intercontinental Exchange (ICE) in September. The FTC ultimately allowed the deal to close after ICE announced its willingness to divest two of BKI’s underlying businesses. We exited the position with a nice gain over our 6-month holding period, as the shares advanced from our average entry of $58.56 to our average sale at $73.43.
Green Brick Partners
GRBK fell from $56.80 to $41.51 during the quarter. The company announced second quarter earnings of $1.63 per share, which far exceeded consensus estimates of $1.18 per share. Full-year estimates for 2023 and 2024 rose from $5.16 and $5.54 to $6.13 and $6.49, respectively. However, the market has become concerned about the impact of higher mortgage rates, and most homebuilding stocks reversed a portion of the gains achieved earlier this year.
There is an old joke: A newscaster reports, ‘The Russians launched ICBMs at America this morning, causing the stock market to plunge, but it rebounded sharply in the afternoon on a rumor that the Fed might cut the discount rate.’
Investors have been conditioned to ignore geopolitical risk.
When Russia invaded Ukraine, the S&P 500 opened down about 2.4%. That was enough selling, as it finished the day up 1.5% and advanced another 2.2% the following day. After the Hamas terrorist attack in October, the S&P 500 opened down 0.5%, but finished up 0.6% before tacking on another 1.0% over the next two trading days.
Apparently, these days geopolitical risk presents itself as a small overnight sell-off creating an immediate buying opportunity.
As we look at the world, there appears to be a real fracture between the United States and a small group of countries that seem to be working together to replace the U.S. as the dominant global power. After Russia invaded Ukraine, we wrote in our 2022 first quarter letter that “there is a decent risk that Pax Americana has come to an end, along with the 13-year-old bull market.” In the year and a half since, the S&P 500 is down.
Our current working thesis is that the leaders of the countries that seek to displace the U.S. would prefer a different U.S. President. For example, Donald Trump says that he would end the war in Ukraine on his first day back in office. From Putin’s perspective, that would have to be welcome. It is also clear that Saudi Arabia’s Crown Prince does not like President Biden. Chinese leader Xi Jinping has refused to speak with or meet with President Biden for years, although efforts are being made for them to finally meet in November.
Perhaps the best way to influence the upcoming U.S. election is to create some combination of wars and recession. Come next summer, nothing would make President Biden less popular than multiple ongoing conflicts and $6 gas at the pump. Having sold down the Strategic Petroleum Reserve and having adopted a policy that discourages drilling for oil, the U.S. has left itself quite vulnerable to higher oil prices. Globally, storage is at a multiyear low.
Higher oil prices would squeeze the consumer and likely cause a recession. The resulting inflation would also put the Federal Reserve in the uncomfortable position of having to fight rising prices at a time of rising unemployment. This leaves the market outlook very concerning.
We are positioned accordingly. With our sale of CPRI, we have limited exposure to the U.S. consumer. Our positive net exposure is expressed almost entirely through the energy sector, and we have added a large macro position via futures and options that will benefit from much higher crude oil prices throughout 2024.
If we are right, current extreme levels of geopolitical tension will lead to lower stock prices over a timeframe that lasts more than a couple of hours. At that point, we intend to be positioned to buy beaten-down stocks and some truly distressed debt, should the opportunity present itself.
The complacent investor view that geopolitics should be ignored might be true, except for the times when it isn’t. We suspect we are in one of those times.
At quarter-end, the largest disclosed long positions in the Partnerships were Brighthouse Financial, CONSOL Energy, Green Brick Partners, Kyndryl Holdings and Vitesco Technologies. The Partnerships had an average exposure of 94% long and 66% short.
“I think it’s wrong that only one company makes the game Monopoly.” – Steven Wright
Best Regards,
Greenlight Capital, Inc.
Read the full letter here or see more hedge fund letters here.
