David Einhorn’s Q1 2024 letter to Greenlight Capital investors, discussing his positions in Solvay SA (EBR:SOLB), PENN Entertainment Inc (NASDAQ:PENN), ROIV (NASDAQ:ROIV), Liberty Global (NASDAQ:LBTYA), and more. Full letter here.
Dear Partner:
The Greenlight Capital funds (the “Partnerships”) returned 4.91% in the first quarter of 2024, net of fees and expenses, compared to 10.6% for the S&P 500 index.
The stock market is fundamentally broken! David discussed this belief and its implications for our investment discipline on the Bloomberg Masters in Business podcast in February.
We first shared our thinking on this topic in our year-end 2020 letter and our contention remains that the market structure has changed such that most investment capital either:
- Does not care about valuation (passive index funds);
- Cannot figure out valuation (most retail investors who have no formal valuation training); or
- Chooses not to care about valuation (various technical strategies, quant strategies, and any trading strategy with short-term holding periods, which by definition expresses an opinion about price, but not value).
The result is that a very small proportion of trading volume today is based on strategies that try to identify which stocks are undervalued in order to buy them for an intermediate or a longterm investment period, with a view that the shares will outperform as they close the discount to fair value.
In fact, so much more money is allocated to passive strategies that they are no longer price takers, relying on the work of other participants to figure out the value and then free-riding on those insights. Instead, these strategies have become price makers, where their flows are an important driver of price.
Portfolio Activity
CONSOL Energy
Our longs had several negative developments. The largest detractor was CONSOL Energy (NYSE:CEIX), whose shares fell early in the quarter due to moderately lower coal pricing. Later in the quarter, the shares further suffered in response to the collapse of the Francis Scott Key Bridge in the Baltimore harbor, which, in the near term, will prevent CEIX from exporting coal from its local terminal. We do not believe the collapse has long-term relevance to the investment. CEIX fell from $100.53 to $83.76 during the quarter.
Brighthouse Financial
We experienced smaller losses in Brighthouse Financial (BHF), which declined 3% following an unexpected accounting change that adversely impacted statutory capital, and Vitesco Technologies (Germany: VTSC), which fell 18% due to a surprisingly low exchange ratio agreed to as part of its previously-announced merger with Schaeffler. In a strategy that ensured we would be half right and half wrong, we sold half our position into the tender offer that closed last year and kept the other half to sell into the merger. We are presently evaluating our options regarding the shares that we kept.
Tenet Healthcare and Green Brick Partners
We had two material winners in the long portfolio. Tenet Healthcare (THC) rose 39%, benefitting from ongoing strength in healthcare utilization and the sale of additional hospitals at premium multiples, suggesting that the stock was significantly undervalued. Green Brick Partners (NYSE:GRBK) advanced 16% in anticipation of another strong year in 2024.
Single-name short portfolio
Since the single-name short portfolio broke even, the result was obviously balanced between winners and losers. On the winning side, our two largest shorts both announced disappointing year-end results and the shares fell double-digit percentages. Another medium-sized short had shockingly poor results and the shares de-rated significantly. Finally, we have several shorts in a niche area of financial services, which suffered significant legal and regulatory events that will likely impair their long-term business models. On the losing side, two of the four difficult shorts we referenced last quarter continued to give us trouble. We covered one and trimmed the other.
SOFR Futures
We had a strong quarter in macro, which added 3.1%, net of fees and expenses, to the quarterly result. Early in the quarter, we established a new large position by selling December 2024 SOFR futures. At the time, the market expected the Federal Reserve to cut short-term interest rates between 1.50% and 1.75% this year. Given the strong economy and possibly reaccelerating inflation, we believed this was highly unlikely and expressed our view directly by selling SOFR futures. By quarter-end, the market came to see it our way and only 0.60% to 0.85% of cuts were priced in. While we still believe this is too much, the asymmetry is less obvious and we’ve trimmed the position to take some profits. The SOFR futures position was the largest winner in the portfolio this quarter.
Gold
Gold was a significant contributor as the price advanced more than 8% during the quarter. The rise in gold was surprising given that typical moves in currencies and interest rates would have suggested a weak quarter for gold. While it’s possible the advance was related to the market beginning to doubt the sustainability and wisdom of both monetary and fiscal policies, other indicia suggest that this was not the case. Our working theory is that there has been a secular trend of the East buying gold from the West. Perhaps the West is running out of gold it is willing to sell, while Eastern demand has remained strong enough to force the price higher.
Solvay
Last quarter, we wrote about a new small position in Syensqo, a spin-out of Solvay, while alluding to a new top 5 position that we were still accumulating at year-end. That position is the former parent, new Solvay (EBR:SOLB), which we unveiled on April 3rd at the Sohn Investment Conference in New York.
SOLB is an essential chemicals business. Its key products are soda ash (sodium carbonate) and BICAR (sodium bicarbonate), peroxides, silicas, fluorine and rare earth formulations and solvents. We established our position at an average price of €22.89 per share. By our estimates, SOLB earned over €5 pro forma per share last year. This year, due to falling soda ash prices, earnings are likely to be in the high €3s or low €4s. We believe this will be a trough result and that the shares were undervalued at less than 6x those earnings. Over the intermediate term, management intends to cut costs and expand some operations, which if successful, should help generate earnings of almost €7 per share by 2028. The company has a conservative balance sheet and a nearly 10% dividend yield. SOLB shares ended the quarter at €25.30. For the full thesis, please review our Sohn Investment Conference presentation that we distributed earlier this month.
Penn National Gaming
We established a medium-sized position in PENN Entertainment Inc (NASDAQ:PENN), an operator of regional casinos. PENN’s current enterprise value is just over $4.3 billion, and based on an 8-12x multiple of free cash flow, we value their land-based casinos between $4.3 billion and $7 billion. PENN also competes in online gaming, particularly sports betting, and we believe the market ascribes a substantial negative value to that effort. To be fair, the online segment has a checkered history. In 2020, PENN acquired a minority stake of Barstool Sports, and three years later agreed to purchase the rest, for a grand total of $551 million. That acquisition was a complete failure, and the company wound up abandoning the investment. It also spent $2 billion in 2021 to acquire Score Media and Gaming to establish a better online sports betting platform. Last year, it entered into a deal with ESPN to launch and operate ESPN BET.
HP
The title of our Sohn presentation was “Solve AI,” which was a play on Solvay’s corporate name. Nonetheless, we established another new long position that actually stands to benefit from AI, which we believe is not reflected in the current stock price. HP Inc. (NYSE:HPQ) sells computers, printers and adjacent products and supplies. We established an initial position at an average price of $30.76 per share, which is about 9x current year earnings estimates. Recent results reflect a two-and-a-half-year cyclical downturn in demand for computers, which followed a mini-boom driven by COVID and related demand for equipment to work-fromhome. We believe that we are, at a minimum, on the cusp of a normal PC refresh cycle, which should drive earnings above estimates. HPQ has committed to return 100% of free cash flow to shareholders through buybacks and dividends. The shares have a 3.6% dividend yield and we estimate HPQ has the capacity to buy back 25-30% of the outstanding shares over the next three years.
Roivant Sciences
We established a small long position in Roivant Sciences (NASDAQ:ROIV). ROIV is a biotech company focused primarily on inflammation and immunology therapies. In addition to an exciting pipeline, ROIV has a strong track record of positive trial results and successful monetization of pharmaceutical assets. The market currently believes core ROIV is effectively worthless, as the company has a market capitalization of about $9 billion, but holds over $6 billion of net cash and a $2.6 billion stake in its publicly traded subsidiary, Immunovant (IMVT). We believe there are several valuable assets inside the company, notably a broad patent estate around lipid nanoparticles used in COVID vaccines for which Moderna and Pfizer may owe ROIV several billion dollars in royalties, a potential multi-billion-dollar specialty autoimmune disease drug that recently passed its 7th successful Phase 2 trial and a novel topical agent to treat skin conditions such as psoriasis and atopic dermatitis. Additionally, we believe there are several other promising earlier stage assets inside ROIV. Lastly, the management team continues to find new opportunities to in-license from larger pharmaceutical companies. ROIV recently announced a $1.5 billion share repurchase program. We acquired our shares at an average price of $10.96. ROIV ended the quarter at $10.54.
Liberty Global
We initiated a small position in Class A shares of Liberty Global (NASDAQ:LBTYA), one of three share classes of Liberty Global. Liberty Global is a mobile communications company with ownership stakes in a number of European operations across Switzerland, the United Kingdom, Belgium, the Netherlands and Ireland. LBTYA trades at a more than 40% discount to our estimate of fair value and we believe company management is focused on closing this gap. The first step will be the spin-off of Liberty Global’s Swiss business later this year. We estimate that the Swiss business, when separately listed, could account for more than half of Liberty Global’s total current market capitalization and could leave its remaining businesses trading collectively at a more than 60% discount to fair value. The company has a history of aggressively repurchasing its own shares, having reduced share count across all three classes by nearly 60% in the past seven years. Liberty Global has announced a plan to repurchase up to another 10% of its shares this year. We acquired our shares at an average price of $19.19. LBTYA ended the quarter at $16.92.
Teck Resources
Finally, we established a medium-sized macro position to benefit from higher copper prices. Long-time partners may recall that in 2021 we presented Teck Resources (NYSE:TECK) at the Sohn Investment Conference. At the time, our thesis was based on a combination of being bullish on copper and believing that TECK was about to exit the penalty box after a multi-year investment in a new copper mine that was on the brink of finally coming online. Back then, TECK traded at C$31.09. Based on copper at $4.50 a pound, we thought the stock was undervalued by half. It has since doubled (and dramatically outperformed copper peer Freeport-McMoRan) and, over time, we have reduced the position into strength.
New York Community Bancorp
In addition to the unsuccessful short referenced above, we closed several other positions. New York Community Bancorp (NYSE:NYCB) announced disastrous results in January. Fortunately, we decided to sell immediately and ask questions later. As a result, we escaped with an immaterial loss. We also sold our small position in First Horizon (FHN) with a gain after the share price advanced by almost 40% over eight months, as we no longer believed the stock to be substantially undervalued.
2024 Partner Meeting
As we announced at our 2024 Partner Meeting, we’ve promoted Josh Hittman to Partner. In 2014, Josh joined Greenlight in a newly formed position of Field Research Analyst and in 2019 he became our Director of Proprietary Research. Josh has done a great job creating a niche role within the investment team and during his time at Greenlight has become a mentor for many of our investment analysts. Congratulations, Josh!
At the time of this writing, the largest disclosed long positions in the Partnerships are Brighthouse Financial, CONSOL Energy, Green Brick Partners, Kyndryl Holdings and Solvay. At quarter-end, the Partnerships had an average exposure of 108% long and 63% short.
“I never had an interest in being a mayor ’cause that’s a real job. You have to produce. That’s why I was able to be senator for 36 years.” – Joe Biden
“No, I would not protect you [NATO]. In fact, I would encourage [Russia] to do whatever the hell they want.” – Donald Trump
Best Regards,
Greenlight Capital
Read the full letter here or see more hedge fund letters here.
