From David Einhorn on Greenlight RE’s conference call today
Greenlight Capital 2016 Letter: The Case For Caterpillar …
The Greenlight Re investment portfolio returned 5% in the fourth quarter bringing the 2016 full year returns to 7.2%. Our long portfolio added 9.2% in the quarter while the short portfolio detracted 3.2%. General Motors was our biggest winner during the quarter. The company reported the third quarter in a row that exceeded investor earnings expectations and later raised guidance to over $6 of earnings per share for 2017.
However, GM continues to get very little credit for its robust operating performance. The bearers continue to believe that the peak in the auto cycle is upon us and their autonomous driving poses an existential threat to GM’s business. We think the current cycle could go further especially if employment strengthens and translates into higher wages. We significantly increased our GM position during the quarter. GM is the second lowest multiple company in the S&P 500 index trading at about six times earnings with a very strong balance sheet. Last year GM repurchased 5% of its outstanding shares.
Resona Holdings, the largest Japanese regional bank was our second biggest contributor during the quarter. The stock rallied in the fourth quarter along with the entire financial sector after the U.S. election as interest rates climbed globally and yield curve steepened. Management continues to make progress cleaning up its balance sheet and is poised to announce the improvement in capital return policies in the next year. Even with the strong recent performance Resona currently earns a 10% ROE and trades at approximately 90% of book value and nine times earnings.
Chemours was a significant positive contributor for the second consecutive quarter as the company continued to make progress on cost reductions, and adaptation of its next generation refrigerant Opteon outpaced expectations. In 2016 Chemours stock price more than quadrupled, it was our second biggest winner. The company recently exceeded earnings expectations and guided to over $1 billion of EBITDA in 2017. We believe Chemours will exceed consensus earnings of about $2 in 2017 and $3 in 2018.
Gold was our largest detractor during the quarter as the price gave back two thirds of the gains from the first three quarters of the year. While rising interest rates were the most responsible for the decline, our long-term outlook remains bullish. The new administration comes with a high degree of uncertainty and its policy initiatives appear to be focused on stimulating growth and with it inflation. The investment portfolio declined 0.5% in January. At month end the portfolio was approximately 103% long and 69% short yielding a net exposure of 35%, that’s about 8% higher than where we began the year as we had gained time longs and have selectively added to our long portfolio.