David Einhorn's Q4 2023 letter to Greenlight Capital investors, discussing his positions in in Alight (NYSE:ALIT) and Viatris (NASDAQ:VTRS), and a small position in Syensqo (EBR:SYENS). Full letter here.
Dear Partner:
The Greenlight Capital funds (the “Partnerships”) returned 22.1% in 2023, net of fees and expenses, compared to 26.3% for the S&P 500 index. Since the inception of Greenlight Capital in May 1996, the Partnerships have returned 2,902.1% cumulatively or 13.1% annualized, both net of fees and expenses. Over the same period, the S&P 500 index has returned 1,117.1% or 9.5% annualized. Greenlight’s investors have earned $5.5 billion, net of fees and expenses, since inception.
2023 was a very good year for the Partnerships. It had been tracking towards a great year until the last couple months when the market took off and most of our short book performed poorly. Bubblelike conditions returned for the most speculative stocks and a handful of our shorts went parabolic.
We believe that the strong returns and alpha from the long book came from a successful adaptation of our style. We have become even more disciplined about price and emphasize investments where we get paid by the issuers, as opposed to relying on other investors to revalue the security. Payment can come to us in the form of buybacks, dividends, interest, or in some cases, a take-out from a buyer. With the decimation of the active fund management industry, we don’t believe we can reasonably expect securities to be re-rated by investors who are actively trying to figure out what they are truly worth. Many of our largest holdings are offering double-digit returns directly to investors.
Green Brick Partners
In 2023, Green Brick Partners (NYSE:GRBK), which had been our biggest loser in 2022, turned into our biggest winner, posting a 114% gain. It began the year trading at under 8x 2023 EPS estimates, which almost doubled over the course of the year. The shares begin 2024 trading at about 7x 2024 estimates. While it is unlikely that the company will again double the published estimates, GRBK appears to us to be poised for another strong year.
CONSOL Energy
CONSOL Energy (NYSE:CEIX) was our second largest positive contributor, with a total return of 61%. The shares began the year trading at only 2.4x 2023 EPS estimates, and even though estimates fell more than 25% over the course of the year, the investment worked out well. Midway through the year, the company switched its capital allocation policy to emphasize stock repurchases and the shares took off. CEIX ends the year at a “nosebleed” P/E of 5.1x 2023 estimates and 5.8x 2024 estimates.
Kyndryl Holdings
Kyndryl Holdings (NYSE:KD) returned 87% for the year and was our third largest positive contributor. This one is a bit trickier to explain, as the company does not currently make money. The loss estimates for 2024 began the year at almost $1.80 per share and ended the year at $0.47 per share. Obviously, this is progress. As a reminder, KD was the result of the spin-out of IBM’s infrastructure services business. It began its post-spinout life saddled with a bunch of unprofitable long-term contracts. The company’s strategy has been to combine improved services with pricing adjustments on renewals in order to eventually earn a reasonable margin. The company has made substantial progress toward this goal, as new bookings came in at improved margins, providing confidence that normal margins can be achieved over the intermediate term. The company has a very large revenue base, so better margins can make a big difference. We estimate that with normal margins, KD can eventually earn $4 per share. Even after appreciating in 2023, the stock trades at just 5x that ultimate earnings power.
Tenet Healthcare
Tenet Healthcare (NYSE:THC) returned 55% during the year and was our fourth largest winner. The stock climbed as the company was able to reduce its reliance on expensive temporary labor and benefited from a stronger healthcare utilization environment, especially on the outpatient side. We did even better by trimming about a third of our position into mid-year strength and then buying much of that back into autumn weakness that was triggered by what we believe are irrational fears that new weight loss drugs will materially reduce demand for hospital care and outpatient surgery. The shares recovered late in the year, particularly after the company sold three hospitals at a premium valuation, which caused the market to rethink the value of the remaining business.
Vitesco Technologies Group
Finally, our fifth largest winner was Vitesco Technologies Group (ETR:VTSC), which returned 44% in 2023. We introduced our investment at the Sohn Investment Conference in May, and in October, the controlling shareholder announced that it would tender the remaining shares at a premium. From the start of the year to the tender price, the shares advanced 73%. While we were not happy with the tender price as we believe it dramatically undervalues the company, our 2023 performance was enhanced by this development.
On the losing side in 2023, we had four short positions that each cost us between 2% and 3% gross (and net). Yes, that is also gross, as in disgusting. Three of the four positions had been winners for us in 2022, but 2023 was a different story. One short doubled, two more than quadrupled and the last one went up more than tenfold. These four stocks contributed substantially all of the negative alpha in our short portfolio in 2023.
We established medium-sized positions in Alight (NYSE:ALIT) and Viatris (NASDAQ:VTRS), and a small position in Syensqo (EBR:SYENS).
Alight
ALIT is a software-based provider of health and wealth benefits and payroll solutions for large enterprises. Over the past few years, the company has undergone a significant cloud-based platform upgrade and has been successful at growing both revenue and profits. The business is much higher quality than most that meet our disciplined valuation criteria. Customer retention is approximately 98% and margins are healthy. We believe that the efficiency of this new platform will enable further cost cutting, leading to improved cash flows that can be used to pay down debt and repurchase its shares. There should be further margin upside, as AI enables ALIT to replace labor with technology. We also believe that a significant overhang on the stock was recently removed when its private equity sponsors exited. We acquired our position for an average price of $7.98, or 10.9x 2024 consensus earnings. ALIT shares ended the quarter at $8.53.
Viatris
VTRS is a manufacturer of generic and off-patent branded drugs. The company was created in 2020 after a merger between Mylan and a division of Pfizer. We previously invested in Mylan, but sold five years ago due to concerns around management’s ability to deliver on promises, as well as deterioration in the generic industry. Those concerns were well-founded, as the shares proceeded to decline by more than 60% after we exited. After a recent management change, we decided to take another look and found that after years of sharp declines, generic drug pricing has stabilized and competition has been diminished. The company’s revenue and cash flow are now growing, and we expect this improvement to accelerate. VTRS’ new management team has simplified its drug portfolio via various divestitures and has committed to returning 50% of free cash flow to shareholders through “aggressive” share buybacks, implying a double-digit capital return based on our estimates. We acquired our shares at an average price of $10.63, or just 4.0x 2024 consensus earnings. VTRS shares ended the quarter at $10.83.
Syensqo
SYENS is a Belgian chemicals business that spun out of Solvay in December 2023. The company is a global leader in specialty polymers and its portfolio of products is used in automotive, electronics, healthcare and other end markets. Additionally, SYENS is one of the few companies in the world that can provide lightweight composite materials critical for modern commercial aircraft and for the latest-generation airborne defense platforms. The spin-off separated out all of the commodities businesses. Hexcel is the most comparable specialty polymer company and it trades at a fancy 29x the 2024 EPS consensus estimate. Since the spin-off, SYENS shares have been weighed down by economic slowdown concerns, but we expect that the company’s niche products should, through the economic cycle, enable it to retain pricing power while growing. We acquired our shares at €92.32, or less than 12x the 2025 EPS consensus estimate, which we expect it to exceed. SYENS shares ended the quarter at €94.26.
We also closed several positions. The Activision Blizzard sale to Microsoft was completed and we exited with a 58% IRR. We sold our iShares Silver Trust at a modest loss, and we exited Southwestern Energy (NYSE:SWN) about flat.
Southwestern Energy
SWN was a frustrating investment. The company hedged natural gas prices when they were low and failed to meaningfully hedge when they were high. The result was much less free cash flow than we anticipated. The fall brought warm weather and lower gas prices. In October, there were news reports that the company could be a takeover target for Chesapeake Energy. With that enthusiasm in the background, we chose to exit our position.
At year-end, the largest disclosed long positions in the Partnerships were Brighthouse Financial, CONSOL Energy, Green Brick Partners, Kyndryl Holdings and Vitesco Technologies Group. The Partnerships had an average exposure of 118% long and 70% short.
"Before you marry a person, you should first make them use a computer with slow internet to see who they really are." – Will Ferrell
Best Regards,
Greenlight Capital, Inc.
Read the full letter here or see more hedge fund letters here.
