David Einhorn’s letter to Greenlight Capital investors for the year ended December 31, 2020, discussing that Tesla short was the biggest loser of the year.
See a PDF version of the full letter here
Einhorn is not done with his questioning of Elon Musk and financials at Tesla. Einhorn states:
We also managed to sidestep most of the significant second-half rally in Tesla (TSLA), as we adjusted our position ahead of its inclusion in the S&P 500 index. Even so, TSLA was our largest loser in 2020, with most of the losses coming in the first half of the year. TSLA cars are not a fad; if they were, TSLA would sell many more than it does. The fad is in owning TSLA stock. We have quipped before that twice a silly stock price is not twice as silly, it’s still just silly. But what about 20 times a silly price? In the 2000 internet bubble, Cisco Systems peaked out at 29 times revenue, which would be a discount to where TSLA now trades.
This begs the question as to why a stock might trade at 20 times a silly price. Of course, there is the possibility that we are just wrong and bad at measuring silliness. But setting that aside, we think that the answer is that certain stocks are held exclusively by valuation-indifferent investors.
In our early training, one of the first concepts we learned is market capitalization, or the share price times the number of shares outstanding. This is what a company is worth in the market today. Valuation analysis means comparing the market capitalization to various indications of value. It might be a comparison to current and future revenues, earnings, cash flows, asset values, etc.
The St. Joe Company Short
Einhorn also had an interesting new development in his ancient fight with Bruce Berkowitz.
He states in the letter:
We’d be remiss if we didn’t give air time in this letter to a fraud – one we had spoken about publicly years ago and whose illegal practices we’ve enumerated to all who would listen to us, including the SEC.
At the Sohn Investment Conference in 2007, David revealed that we were short The St. Joe Company (JOE), a land development company based in Florida. At the Value Investing Congress in 2010, David presented “If you build it, they won’t come,” which detailed how a number of JOE’s real estate investments were impaired, yet the company’s financial statements did not reflect as much. We complained to the SEC. Five years later, the SEC ultimately agreed with our analysis and fined JOE for improper accounting of its real estate assets during the financial crisis. After initially denying our claim, the SEC agreed that David was, upon appeal, entitled to a whistleblower award. The award was remitted to the funds in November 2020.
As slow and inhospitable as the SEC was to our whistleblower claim a decade ago, the situation has become even worse. We are short Assured Guaranty (AGO), based on our original thesis that it has several billion dollars of likely embedded losses on its exposure to Puerto Rico, where it refuses to take accounting reserves. We presented our thesis at the 2018 Sohn Investment Conference.
After our presentation, we learned that Standard & Poor’s (S&P) was making a substantial error evaluating AGO’s international project financing portfolio. These bonds are not guaranteed by any taxing authority, yet S&P incorrectly assigns a capital charge that implies they have the safety of government guarantees. Were S&P to assign the correct capital charge, we believe it would reveal that AGO could not sustain its current credit rating. We contend that S&P is not following its own rating guidelines. We pointed this out to S&P, who essentially told us to pound sand.
Under Dodd-Frank, the SEC directly supervises rating agencies. So, we complained to the SEC in a detailed letter. The SEC reached out to us to let us know that the letter appeared very compelling and they would take the matter seriously. In fact, they had hired an outside advisor to help with the technical areas of our complaint.
A few months later, the SEC called back to tell us they had reached a “decision point.” They had conducted an investigation by requesting information about the company’s business in an area that was not at all related to what we were complaining about. Unsurprisingly, they did not find fraud in these unrelated areas, so they would likely close the investigation. We encouraged them to actually look at the subjects we complained about. The SEC has since been silent.