Greenlight Capital Q1 2013 letter to shareholders is out. Earlier today, Sam Forgione of Reuters had a short summary on the Greenlight Capital Q1 2013 letter. Greenlight Capital is up 5.8 percent net for Q1. Returns in April were hurt by losses in gold. Below we have the full hedge fund letter (see Greenlight Capital Q42012 here). Some notable comments from the letter include CEO David Einhorn’s (more subtle) attack on Ben Bernanke and other Central Bankers’ policies. Greenlight is profiting off of Japanese Central Bank actions with their yen short position. The letter discusses the large holding in Apple Inc. (NASDAQ:AAPL), and the hedge fund’s bullishness on the tech giant. David Einhorn jokes that the media over-reacted to recent news from Apple and made the company sound as if they had hired Microsoft CEO Steve Ballmer, whom Einhorn has critiqued in the past.
Einhorn notes that he still believes Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) is a good short (the May 8th letter quotes GMCR’s closing price before the 23 percent gain today). Einhorn closed other shorts and longs including, ESV, AVB, MBIA, and XRX. One new position is Greenlight’s purchase of Evonik. Einhorn discusses his purchase of Oil States International, Inc. (NYSE:OIS), which he publicly disclosed yesterday at the Ira Sohn Conference. Recently, JANA Partners purchased a 9.1 percent stake in the company. Greenlight has promoted Alexandra Jenkins to partner who Einhorn credits with being the mastermind behind the fund’s Herbalife Ltd. (NYSE:HLF), Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) and The St. Joe Company (NYSE:JOE) shorts. The hedge fund also notes plans to expand the office. The full Greenlight Capital Q1 2013 letter can be found below:
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Greenlight Capital Q1 2013 Letter
May 8, 2013
The Greenlight Capital funds (the “Partnerships”) returned 5.8%, net of fees and expenses, in the first quarter of 2013.
It was a quarter of reversal: Marvell Technology Group (MRVL), our biggest loser in 2012, was our biggest winner this quarter. Yen puts, our biggest losing position in both 2010 and 2011, were our next biggest winner. On the other hand, Apple (AAPL), a top three winner in 2011 and 2012, was our biggest loser.
Overall, it was a decent start to the year with a good risk-adjusted return. It’s unlikely for us to keep up with the sort of one-way market that we saw in the first quarter, where the S&P 500 never suffered more than a trivial weekly decline. Our long portfolio roughly matched the S&P 500, we had a modest loss in our short portfolio, and macro was positive.
We are four years into an economic recovery. Corporate earnings, which grew steadily during the initial stages of the recovery, are now growing anemically. The market advance can be better explained by investors convincing themselves that extraordinarily accommodative monetary policy is bullish for stocks. Unconventional monetary policy is now a global phenomenon.
Greenlight Capital Q1 2013 Letter: Yen Short
The Japanese government replaced its conservative central banker with a more aggressive one. This regime change has led Japan into the global battle to see who can debase their currency the fastest and this drove our gains in Yen puts, as the Yen weakened from ¥86.74 to ¥94.19 against the dollar.
Greenlight Capital Q1 2013 Letter: Central Banks
Now every major central bank is fully engaged in aggressive, unconventional policy. It seems that as each bank implements a new experiment without immediate consequence, the new policy is deemed safe, if not effective. Other central bankers notice and, acting in the philosophy of ‘Anything you can do, I can do better,’ take turns in one-upmanship. This serially correlated behavior smacks of bubble mentality. But investors are currently complacent about the unintended consequences of central bank money printing, and like most investment cycles and fads, this will persist until it doesn’t. Under the circumstances, it is curious that gold isn’t doing better.
Greenlight Capital Q1 2013 Letter: Apple
AAPL shares fell from $532 to $443 during the quarter. The biggest problems with our AAPL investment are disappointing earnings and a diminished forecast. When Apple Inc. (NASDAQ:AAPL) announced its year-end result, it made clear that it would earn less in the March quarter than it did a year ago. Forward estimates have been falling for a while. Last July, consensus estimates for fiscal 2014 were $64 per share; estimates now stand at $44. When we thought the company would earn $64 per share, the shares seemed cheap even as they reached $700 in September. Of course, that required Apple Inc. (NASDAQ:AAPL) to meet that forecast.
Our thesis is that AAPL has a terrific operating platform, engendering a loyal, sticky and growing customer base that will make repeated purchases of an expanding AAPL product offering. Unfortunately, there have been a series of disappointments including slower sales growth, lower margins, and increased competition. There have also been delays in new carrier wins, next generation product introductions, and new product category launches. While all of these have had an understandably negative impact on AAPL’s share price, we take a longer view and believe our thesis is intact.
As shareholders, we watched AAPL accumulate a cash stockpile greater than the market capitalization of all but 17 companies in the S&P 500, and recognized that its high cost of capital and shareholder-unfriendly capital allocation were depressing the stock price. AAPL’s management and Board, either unconcerned or unaware of the detrimental effects of AAPL’s all common equity capital structure, seemed uninterested in finding a solution. As shareholders who believe in AAPL’s core business, we wanted to help AAPL resolve its cash problem in a way that satisfied AAPL, the market, and its shareholders.
Based on years of observation and many discussions, we believed that AAPL would not issue debt under any circumstances, and especially not to return cash to shareholders. With this in mind, coupled with our awareness that AAPL was loath to repatriate (and thereby pay taxes on) its overseas cash, last year we suggested iPrefs to Peter Oppenheimer, AAPL’s CFO. We had no better luck than any of the many other investors and analyst who for years have pressed Apple to return excess capital to shareholders. Our concerns fell on deaf ears.
Greenlight Capital Q1 2013 Letter: CalPERS
In February, CalPERS came out in loud support of a proposal aimed at improving AAPL’s corporate governance that inexplicably bundled several measures into a single voting measure. The proposal, which included an unwarranted provision prohibiting AAPL from issuing preferred stock, was in direct violation of SEC rules, and we filed a lawsuit insisting that AAPL allow the shareholders to vote on each measure separately. We believed this would generate a public dialogue around AAPL’s capital allocation strategy.
Greenlight Capital Q1 2013 Letter: Ballmer
When Tim Cook later called the lawsuit a sideshow, it was understandable. Whereas we chose to focus on the very real issue of Apple’s capital structure, others seemed more intent on turning things into a circus. A lawyer known mostly for preserving the autonomy of Boards to act in any manner they wish wrote a piece titled Bite the Apple; Poison the Apple; Paralyze the Company; Wreck the Economy. Given the hysteria implied in the title, one would think we had suggested that AAPL hire Steve Ballmer to run new product development. A retired Fortune 500 CEO said “I’d give Einhorn the back of my hand,” prompting us to wonder why he wouldn’t give us the front of his hand. Perhaps most startling was the reaction from CalPERS, who vigorously defended the proposal.
The essence of corporate governance is form over substance. The belief is that properly made decisions will lead to better decisions, so it was odd to watch self-identified corporate governance advocates support a proxy proposal that violated SEC rules. Incongruously, CalPERS believes good corporate governance is unnecessary when approving policies that purport to improve corporate governance.
Others ignored the circus and focused on the balance sheet. We received feedback from many AAPL shareholders, including some of AAPL’s largest institutional investors, thanking us for initiating the public discussion. Even some who disagreed with our idea helped further the public debate. Respected NYU finance professor Aswath Damodaran wrote a critical piece that pushed us to refine our presentation of the iPrefs idea. These thoughtful responses reinforce the value of speaking publicly, despite the more obvious drawbacks.
In the end, the judge sided with us, and AAPL withdrew the proposal from consideration. Once the shareholder meeting passed, there was nothing left for a court to do, so the case became moot and was dropped. Not long after, we met with AAPL management and its investment bankers to further discuss AAPL’s options. We believe that our thoughts were given a fair hearing.
Greenlight Capital Q1 2013 Letter: Apple Summary
Ultimately, the Board and AAPL decided to abandon their “no debt” philosophy and gave birth to iBonds. As rejections go, AAPL’s bond issuance ($17 billion in bonds were issued at about a 2% average interest cost) was as good as anything shareholders could have hoped for and the market seems to agree. AAPL announced that it will return $100 billion to shareholders by the end of 2015 and will evaluate returning additional capital annually. This vastly more shareholder-friendly capital allocation policy is a dramatic shift from where AAPL stood just a few months ago. We have added to our AAPL position. We now await the release of Apple’s next blockbuster product.
Greenlight Capital Q1 2013 Letter on GMCR
The other significant loser in the quarter was Green Mountain Coffee Roasters (GMCR). We would love to be the “Credentialed Bear” that gets invited to ask tough questions at its annual shareholder meeting, but we aren’t waiting by our iPhones. Shares of GMCR increased from $41.34 to $56.76 in the quarter.
Greenlight Capital Q1 2013 Letter on Vodafone
In addition to MRVL and the Yen, Vodafone Group Plc (NASDAQ:VOD) (LON:VOD) was another material winner during the quarter. It is now clear that Verizon does in fact want to buy Vodafone Group Plc (NASDAQ:VOD) (LON:VOD)’s 45% interest in Verizon Wireless. We can hear them now. We believe that a premium sale followed by a successful return and/or redeployment of the proceeds could unlock substantial value latent in VOD stock. VOD without Verizon Communications Inc. (NYSE:VZ) might also become a good acquisition target for AT&T. During the quarter Vodafone Group Plc (NASDAQ:VOD) (LON:VOD) shares advanced from £1.54 to £1.87.
Greenlight Capital Q1 2013 Letter on Marvell
Marvell Technology Group Ltd. (NASDAQ:MRVL) reversed its 2012 decline as investors began to pay attention to Marvell Technology Group Ltd. (NASDAQ:MRVL)’s prospects for share gains in controllers for hard disk drives and flash memory drives, as well as its new processor for cell phones and tablets. The company should see significant fixed operating leverage in 2013, as it has been carrying the cost of the investments in these products without any corresponding revenue until now. The company has also continued to buy back stock aggressively, adding to the potential earnings leverage.
Greenlight Capital Q1 2013 Letter on New Purchase in Europe
We initiated a long position in Evonik Industries AG (ETR:EVK) (FRA:EVK), a global chemical business, through a private placement at an effective price of €29.13 per share, ahead of a public listing in April. Evonik Industries AG (ETR:EVK) (FRA:EVK) has a high quality portfolio of chemical assets in the U.S., Europe and Asia, including market leadership in methionine, a high margin, high structural growth business that tracks the demand for animal feed. Evonik Industries AG (ETR:EVK) (FRA:EVK)’s business is less cyclical than that of its European peers as demonstrated by its positive EBITDA growth each year even during the recession. EVK is currently in the middle of a capital investment cycle that we believe will enable it to grow its earnings power from €2.50 in 2012 to €4.00 per share in 2015/2016. We think that its combination of secular growth, superior asset quality, and low cyclicality makes EVK the premier European chemical company, which deserves a rerating to a premium multiple.
Greenlight Capital Q1 2013 Letter: OIS
We initiated a long position in Oil States International, Inc. (NYSE:OIS), a solutions provider for the oil and gas industry, at an average price of $77.16 per share. Oil States International, Inc. (NYSE:OIS) has four business segments: Well Site Services, Tubular Services, Offshore Products, and Accommodations. We believe that the company trades at a significant discount to the sum of its parts. Though the shares trade at slightly less than 7x 2013 EBITDA (a multiple typically associated with its lower multiple businesses), the majority of its profits come from Accommodations, which is a high growth, high return-on-capital segment that deserves a much higher valuation. At 8.6x 2013 EBITDA, an appropriate multiple given a sum of the parts analysis of OIS’s business mix and where comparable companies trade, OIS would be worth close to $120 per share. We believe that OIS could unlock significant shareholder value by converting the Accommodations unit into a REIT and separating it from the rest of the company; if completed, it would suggest a valuation of $155 per share.
Greenlight Capital Q1 2013 Letter: Closed positions
We closed several positions during the quarter including longs in Ensco plc (NYSE:ESV) and Xerox Corporation (NYSE:XRX), and shorts in AvalonBay Communities Inc (NYSE:AVB) and MBIA Inc. (NYSE:MBI).
Greenlight Capital Q1 2013 Letter: ESV
We bought ESV, an offshore contract oil driller, after the Macondo oil spill. At the time, we believed that the shares were depressed over fears of curtailed offshore drilling. Subsequently, the fears were resolved and the drilling business recovered. We earned a 34% compounded return over our 4+ year holding period. The return was helped by favorable trading around the position. We sold in order to redeploy the capital into OIS.
Greenlight Capital Q1 2013 Letter: XRX
Xerox Corporation (NYSE:XRX) did not perform as well as we had hoped. We bought the shares based on expectations that synergies from its acquisition of Affiliated Computer Services would lead to revenue growth and margin improvement. Unfortunately, the company did not deliver. Despite this, we sold the shares for a modest gain.
Greenlight Capital Q1 2013 Letter: AVB
We finally gave up on our short of AvalonBay Communities Inc (NYSE:AVB). Our initial short in early 2007 worked nicely during the credit crisis, but we overstayed our welcome. It is a mediocre business with cyclical risk and an extreme valuation due to its REIT nature. Nonetheless, the company recently acquired Archstone properties and issued a lot of stock. The shares declined from their recent highs and we took the opportunity to admit defeat and exit with a loss.
Greenlight Capital Q1 2013 Letter: MBIA Short
During the quarter, we finally declared victory on our MBIA Inc. (NYSE:MBI) short, which we have held in some capacity since 2002. It was rough sledding for the first five years until the stock collapsed from $76 to $2 between 2007 and 2009. This was another case of a misunderstood business and a management team engaged in assorted accounting and business chicanery. While it is possible that sleepy regulators will ultimately put this company and its management out of their misery, the opposite seems equally possible. We’ve decided to enjoy the healthy profit we made and step aside for the time being. Cumulatively, this was the third most profitable short position in our history.
Greenlight Capital Q1 2013 Letter: Personal update
We have several organizational updates. At the 17th Annual Partner Dinner in January we announced the promotions of Alexandra Jenkins and Claire Davis to Partner. Alexandra joined Greenlight in 2004 and over her years here, the Partnerships have benefitted from her ability to conduct detailed objective analysis resulting in thoughtful and often humorous position write-ups. With great dedication, she has contributed to many successful investments including Lanxess and many retail shorts. Greenlight had a relationship with Claire for many years through Greenlight Masters before she joined in 2009 and brought her unique skill set to the investment team. Notably, she has done the heavy lifting on many of our short positions including St. Joe, Green Mountain and Herbalife. We congratulate Alexandra and Claire on their promotions to Partner!
Greenlight Capital Q1 2013 Letter: New Analyst
Garrett Jones joined Greenlight as a research associate to work in our Dallas office. Prior to joining Greenlight, he was an analyst at Nicusa Capital, a concentrated value-oriented long/short equity hedge fund. From 2006 to 2009, he was a consultant at Booz & Company where he focused on corporate modeling. He received his MBA from Columbia and his B.A. from Dartmouth. Garrett is both an Eagle Scout and a black belt which makes him our top choice to explore St. Joe’s still undeveloped acreage.
Andrew Frohman, a research associate based in Dallas, left in March. Jaimin Patel, a research analyst with us since 2008, left in April to take some time off and pursue a new opportunity. We wish Andrew and Jaimin well in their future endeavors.
Greenlight Capital Q1 2013 Letter: Expansion Plans
Our lease in New York expires next September. We decided that we really like this space, and rather than relocate, we negotiated to expand our facilities to the floor below us. We have entered into a new lease which expires in 2024. We will start the new construction in June, including a staircase to connect the floors, and hope to move in by the fourth quarter.
When we announced a goal of more “idea generation” at the annual meeting, some of the staff took that quite literally. Greenlight welcomed a future analyst, an allocator and a philanthropist this quarter as Alexandra Jenkins and her husband Tim welcomed baby Caroline, Mitch Golden and his wife Kimberly welcomed baby Annabel, and Jenn Hoos Rothberg and her husband Jon welcomed baby Elliott.
Greenlight Capital Q1 2013 Letter: Exposure
At quarter end, the largest disclosed long positions in the Partnerships were Apple, General Motors, gold, Marvell Technology and Vodafone Group Plc (NASDAQ:VOD) (LON:VOD). The Partnerships had an average exposure of 123% long and 77% short.
“The fruits of life fall into the hands of those who climb the tree and pick them.”
— Earl Tupper
Further reading- David Einhorn Drops Hint He is Shorting Major Canadian Retailer