David Einhorn’s remarks from Greenlight Capital Re, Ltd. (GLRE)’s first quarter earnings call. Readers can also listen to the full call embedded below
Thanks, Simon, and good morning everyone.
The Greenlight reinvestment portfolio declined 11.8% in the first quarter. Our longs detracted 5.2% and our shorts detracted 6%. Despite a good earnings season for our portfolio in which most of our largest divisions reported fundamentals that were consistent with our investment thesis, we managed to lose a bit of money on most divisions with no material winners to offset the losses.
Perhaps some of this can be explained by growth stocks continuing their historic outperformance over value stocks in the first quarter. Regardless the quarterly result was one of our worst.
The biggest winners for the quarter include our long position in Micron Technology and our short position in Tesla, though neither was particularly material. We did not have any very large losses either. The biggest however were our short in Netflix and our long in General Motors.
Netflix advanced 54% in the first quarter. The company added 2 million more subscribers than expected, but the cost to acquire each marginal customer rose, as the company increased spending on content marketing, technology, and development. As a result, free cash flow is deteriorating after burning $2 billion in cash in 2017 Netflix is guided to $3 million to $4 billion cash burn in 2018 and expects to be free cash flow negative for several more years. In our view Netflix has demonstrated an ability to turn cash into subscribers but not the ability to turn subscribers into cash.
It is difficult to explain why General Motors declined 10% in the quarter. GM reported a very strong fourth quarter and gave guidance far ahead of consensus for both 2018 and 2019, which ordinarily would lead to a good stock performance, especially given GMs undemanding valuation.
Our experience with GM extended to a number of our other our core long positions which offered strong results and of course stock price performance. While we maintain conviction our investment theses, we were focused on reducing our gross exposure through the first quarter. The investment portfolio is currently 93% gross long by 65% gross short and began the year at 101% long by 67% short. We recently disclosed a hedge position, where we are long Puerto Rican debt, and short the stock of a short guarantee, a bond insured with significant exposure to municipal bonds that are now rated below investment grade including a heavy concentration in Puerto Rico.
We think AGO's proprietary rating system does not adequately reflect the credit deterioration. We believe actual losses will be higher than management's accounting for. The company's aggressive capital return plan might be good for shareholders in the short-term but negative for both of them and policyholders in the long-term.
We exited a handful of positions during the quarter including Camorra's and Uniper with profit and a coupled industrial shorts with small losses. The investment portfolio returned minus 0.5% in April in what was a nondescript month. Simon, Mike, and the rest of the team have done a phenomenal job revamping our underwriting and reserving processes in a short time period. While I'm glad we showed a positive underwriting result during the quarter and even more excited about the long-term prospects for Greenlight Re as the team continues to reassess and improve in every operating area.