David Einhorn’s Greenlight Capital just released its Q3 letter to investors. Bloomberg reports that the value hedge fund has added medium-sized long positions in CONSOL (CNX) and EMC (EMC). Einhorn closed out his short positions in Keurig Green Mountain (GMCR), lululemon (LULU), Joy Global (JOY) and Under Armour (UA), according to Bloomberg. A copy of the letter obtained by ValueWalk seems to indicate almost explicitly that Einhorn is short AMZN as well, however, Einhorn does not say it definitively. Greenlight Capital and Jonathan Gasthalter of high-powered public relations shop Sard Verbinnen, declined to comment on the matter. Readers can see an excerpt from the letter below.
Greenlight Q3 letter excerpt.
November 5, 2014
The Greenlight Capital funds (the “Partnerships”) returned (3.9)%,1 net of fees and expenses, in the third quarter of 2014, bringing the year to date net return to 2.2%. By comparison, the S&P 500 index returned 1.1% during the quarter and 8.3% year to date.
Apple, Greenlight Capital’s only material winner
It was a frustrating quarter. We lost a small amount on longs, shorts and macro. We had a typical number of individual losers, but an unusually large number of days with small losses: half the trading days ended with us losing less than 50 basis points. We had the unusual experience of going the entire quarter without a day where we made more than 70 basis points. In fact, looking at the quarter’s contribution from profitable positions, we haven’t had a quarter this thin in about three years; Apple Inc. (NASDAQ:AAPL) was our only material winner. Prior to Civeo Corp (NYSE:CVEO)’s September 29th news (discussed thither below), nothing particularly bad happened; we just got ground down gradually. In such circumstances, it’s not obvious what to do other than stay the course and be patient.
AAPL advanced from $92.93 to $100.75. Consumers are enthusiastic about the new phones and services, and our thesis is playing out. AAPL’s iOS platform continues to attract new customers while retaining old ones, without commoditizing the margins. The company’s stock buyback is adding several percent to EPS growth. AAPL is expected to grow revenues faster than Amazon.com, Inc. (NASDAQ:AMZN) this quarter. Remarkably, AAPL still trades at less than a market multiple.
Greenlight Capital: Amazon disappoints
We added to our exposure of “Bubble Basket” shorts. AMZN’s recent disappointment is notable in that for years, the story has been that AMZN isn’t profitable because it is growing so fast. Now growth is slowing, but rather than unleashing higher profits, the slower growth is leading to even greater losses. One of the principal bullish assumptions supporting many bubble stocks is, “the company is growing too fast to be very profitable.” We think AMZN is just one of many stocks for which this narrative will ultimately prove false.
We had three material losers in the quarter:
1. United States Steel Corporation (NYSE:X), a short position, rose from $26.04 to $39.17. Earlier this year, X announced that it was having production problems due to a shortage of raw materials. This led to panic ordering by its customers and a spike in hot-rolled steel prices. X capitalized on the spike and announced better-than-expected…
2. We had a loss in Mallinckrodt (MNK), another short position, whose shares advanced from $80.02 to $90.15 after the company completed its acquisition of Questcor. In our last letter, we elaborated on the many problems facing Questcorâ€™s H.P. Acthar Gel. These problems persist. We believe that the instant gratification provided by an accretive acquisition proved too tempting for MNK’s CEO, blinding the company to the many risks that come along with it.
3. CVEO, the accommodations business that was spun off from Oil States International in June, saw its stock collapse at the end of September. The purpose of the spin-off was to separate this unit so that it could become a leveraged real estate company that would distribute the majority of its cash flows. The exact structure was to be decided by the board of directors in late September, with most investors believing it would convert to a U.S. REIT.
Instead, the company reported a substantial operating shortfall and announced that it would redomicile to Canada without changing its existing capital return policy. We believe that the company’s strategic decisions need to be re-evaluated and that the current CEO, who has lost credibility in the marketplace, needs to be replaced. CVEO shares fell from $25.03 to $11.61. We made new medium-sized long investments in CONSOL Energy (CNX) and EMC Corporation (EMC). CNX owns significant coal and natural gas reserves. Since its legacy is in coal and CNX is covered mostly by coal analysts, its stock has languished along with other coal stocks. However, CNX is transforming itself into a natural gas company.
It is investing in shale gas production, while harvesting cash from its operating coal assets and selling its coal reserves. CNX’s natural gas production is growing 30% per year, with substantial acreage in the Marcellus and Utica shale formations and some remaining low-cost domestic thermal coal assets. We believe that as analysts recognize CNXâ€™s change in asset mix from coal to gas, the shares should re-rate. Our average entry price is $38.88 and CNX shares ended the quarter at $37.86. EMC is an enterprise storage systems provider with additional operations in software virtualization via a majority ownership stake in publicly traded VMware (VMW), and emerging cloud infrastructure and application development software via a business called Pivotal.
These businesses essentially operate as independent companies, but trade as one under EMCâ€™s corporate structure, which we believe has caused EMC to trade at a sizable discount to the sum of its parts. Implicitly, the market values EMCâ€™s industry leading storage business at less than 5x EBIT, a significant discount to publicly traded storage peers and most enterprise hardware companies. EMC management acknowledges that the
combined business trades at a discount and has recently committed to trying to address it in early 2015. Our average entry price is $25.79 and the shares ended the quarter at $29.26. We closed out a number of positions including the remainder of our short position in Keurig Green Mountain (GMCR). While it would be tempting to write an entire book on our experience with this ultimately unsuccessful short (our average sale was at $47.59 and our average cover was at $67.02; we had many opportunities to trade this position to a successful result, but failed to do so), we will confine ourselves to a few paragraphs. As many of you recall, GMCR was the subject of our October 2011 presentation titled GAAP-uccinoâ€ at the Value Investing Congress.
The gist of our thesis was that the company had engaged in various accounting shenanigans, the market opportunity would prove smaller than the bulls thought, and the 2012 patent expirations on K-cups would attract competition, limiting growth and margins. As far as we can tell,