David Einhorn, despite a 14.2% portfolio loss in the third quarter, thinks that the SunEdison stock sell-off is overdone, expects CONSOL will be cash flow breakeven and continues to be long in gold. See his remarks from the Greenlight Re conference. Audio and transcript below.
Also make sure to check out David Einhorn‘s Q3 letter here.
David Einhorn – Greenlight Capital Re, Ltd. – Chairman
Thanks, Bart, and good morning everyone. The Greenlight Re investment portfolio lost 14.2% in the third quarter, bringing the year-to-date return to minus 16.9%. Our biggest detractors in the quarter were long investments in CONSOL Energy and SunEdison. We continue to hold positions in both companies and believe that each was traded at a price that severely understates the fundamental value of the business.
A number of our other longs including Apple, AerCap, Chicago Bridge & Iron and General Motors also sold off during the quarter on worries about the impact of a slowdown in emerging markets.
CONSOL Energy’s stock price dropped 55% in the third quarter, far outpacing the drop in coal and natural gas prices. The market remains [rapidly] focused on the near-term prospects for Appalachian coal and natural gas and is overly discounting the Company’s long-term resource value. CONSOL’s management is taking measures to improve operational efficiency while growing its production. Even at current depressed commodity prices, we expect the company will be cash flow breakeven or better from here as the management team is focused on cost cutting and reducing CapEx without sacrificing production.
A number of factors contributed to SunEdison’s stock price collapse in the third quarter. Just as investor appetite for energy dividend flow through structures began to vain, SunEdison launched the IPO of TerraForm Global, a yield-co created to purchase emerging markets’ projects. As the share price of both SunEdison and its related yield vehicles fell, the company effectively lost access to the capital markets and the market worried that SunEdison could run out of money in the absence of a natural buyer for its projects. We think the sell-off is overdone; SunEdison management has adjusted its strategy in response to the falling stock price. The company has raised additional equity, identified a third party to buy its projects, and slowed its development pipeline. We think the situation has stabilized and we see the potential for a significant recovery in the stock price from current levels.
Our short book contributed 7.5% in the third quarter and helped offset some of the negative performance in our long portfolio. The winners include Mallinckrodt in Keurig Green Mountain.
During the quarter we added two new medium-sized positions in Michael Kors and UIL Holdings. Michael Kors’ shares fell after a disappointing first quarter. But we believe the fall product line has much improved and the company has multiple avenues of growth going forward. The company has a net cash balance sheet in trades at a single-digit multiple of expected earnings.
UIL Holdings is as an owner and operator of regulated utility assets and announced a merger with Iberdrola USA in February that we believe will result in a less levered entity than its peers with a large tax asset and attractive renewables cash flows that are not fully reflected in the current stock price.
We reduced our gross exposure by 30 points in the quarter. Our net exposure increased slightly from 21% to 26% as we covered several shorts during the market sell-off in August. We continue to hold macro positions including gold, short Asian currencies and short French sovereign bonds. Overall, it’s been a challenging environment. We are optimistic that we should get some recovery from our beaten down long portfolio.