Value Investing

David Einhorn’s Remarks From The Greenlight 3Q17 Earnings Call

David Einhorn’s remarks from the Greenlight Re earnings call for the third quarter ended September 30, 2017.

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Thanks Simon and good morning everyone. Happy Halloween. The Greenlight Re investment portfolio is up 5.5% in the third quarter; our long has contributed 9.1% and our short detracted 2.9%. The biggest winners in the quarter were CONSOL Energy, General Motors and Uniper; our largest detractors were Caterpillar short position and Mylan.

CONSOL recovered its loss from the prior quarter, as the market focused on the upcoming separation between CONSOL’s coal and natural gas businesses. Once the two businesses are separated, we believe the market rerate to natural gas pure play with a focus on CONSOL’s vast and valuable assets.

GM advanced 16% during the quarter, as the company continued to post strong operating results, close the sale of its money-losing European business and showed progress in its Auto 2.0 position, which includes investments in electric vehicles, autonomous driving and lift. We are encouraged by the steps management took to improve its cost of capita as GM continued a significant stock buyback and completed a $1 billion perpetual preferred stock offering.

Uniper shares were 41% on rumors that Uniper was a buy-out target, and at the end of the quarter Finnish utility, Fortum announced an agreement to purchase E.ON’s 47% stake in Uniper at 22 euros per share. Management rebuffed the bid as it was materially below its estimate of fair value. The company continues to execute and in August Uniper announced strong earnings, rates at the low end of its earnings guidance for next year and dividends guidance from 15% growth to 25% growth.

On the other hand, Caterpillar shares rose 16% in the third quarter, as the company raised earnings guidance. This was the company’s second straight beat and raise, which has led analyst to conclude that Caterpillar is entering a new up cycle. Caterpillar traded at 26 times the shares earnings implying investors to believe that it’s still well below mid-cycle earnings.

We believe the biggest drivers of Caterpillar’s business are mining, which is played by over-capacity from the China led deal super-cycle; the energy sector, where oversupply is leading slower investment in construction where are already half way near the cyclical peak. We see short term inventory builds and double ordering influencing recent results, and we believe the company is poised for a significant disappointment next year.

Mylan fell 19% during the quarter, as delays in new drug approvals and accelerated price deflation for generic drugs weighed on the stock and led management to reduce guidance. This month the FDA approved a few of Mylan’s products including a generic form of Copaxone. Mylan landed the first approval with potential exclusivity for generic Copaxone and as a result the stock has retraced its entire third quarter decline.

Lastly, Greenlight Capita led to her to its hedge fund clients discussing its quarterly performance. While most understood the rhetorical argument the letter made on value investing, some misconstrued the letter as an abandonment of value investing as a strategy, nothing could be further from the truth. We have been challenged last few years as value investing has made headwinds, however we believe this simply a cyclical phenomenon and do not plan to change our strategy.

I just spent several days in the Cayman Islands for a Board meeting, and the team is energized under its new leadership. In a very short time, Simon and Mike have made tremendous impact and we’re excited to see the progress in the upcoming year. Despite the unfortunate headwinds from the natural catastrophe events during the quarter, we’ve shown the benefits of our dual engine strategy.

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