David Einhorn: Tremendous value in Apple’s brand; Long American Capital Agency

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David Einhorn on the Greenlight Capital RE Conference Call.See his Q1 letter which came out yesterday for some more background on Einhorn’s comments. Einhorn has some new positions which were not mentioned in the letter (or prio to that) to my knowledge. Also, Einhnorn will be speaking at the Sohn Conference tomorrow which we of course will be covering so stay tuned for that.

Transcript and audio via S&P Capital IQ


David Michael Einhorn
Chairman, Member of Underwriting Committee and Chairman of Greenlight Re

Thanks, Mark, and good morning, everyone. The Greenlight Re investment portfolio returned 2.5% in the first quarter. During the quarter, we made money in longs, shorts and macro positions. We had a few significant winners during the quarter. CONSOL Energy gained 43%. The company announced further successful drilling results, an improved cash flow profile and a $420 million sale of its met coal assets. Michael Kors Holding beat earnings expectations for the third quarter in a row, and the shares rallied 42%. Our thesis that Kors is not a fad, but a fundamentally healthy brand is playing out. Earnings estimates are rising, and the stock still trades at just 11x earnings when you back out the net cash position. Stock is cheap on an absolute basis and trades at a large discount to similar branded consumer goods companies.

Our bubble basket of shorts fell 13% during the quarter as investor sentiment shifted away from momentum in January and February and investors were less forgiving of earnings disappointments. We actively trade and update the basket composition, and during the quarter, we covered a few positions, including Mobileye and Viva [ph]. Gold was up 16% in the quarter as the ECB announced a kitchen sink policy, the Bank of Japan announced negative interest rates and the U.S. Fed reduced its forecast for future rate hikes. These increasingly aggressive and counterproductive monetary policies are bullish for gold.

Our 2 biggest performance to track us [ph] for the quarter Resona and SunEdison. Resona Bank shares fell 32% on the BOJ’s implementation of the negative rates. Although negative rates present a headwind to all Japanese financials, Resona trades at just 60% of its book value, which we believe is too low for a bank earning a double-digit ROE without a credit or capital issue.

SunEdison collapsed during the quarter and filed for bankruptcy subsequent to quarter-end. Unfortunately, we underestimated the fragility of the situation. We are very disappointed with the outcome.

During the quarter, we found a few new long positions in mortgage REITs, American Capital Agency and Hatteras Financial; the global apparel company, PVH Corp.; natural gas; and Yelp. In our current portfolio, we’re both bullish and bearish. We’re bullish on companies that trade at low multiples, have a high margin of safety and are fundamentally executing as we’ve seen from the excellent quarterly results from CONSOL Energy, Michael Kors and GM. We continue to own Apple, which is traded down to a single-digit PE of a bare case earnings. We believe there is tremendous value in Apple’s brand and growing global customer base that periodically buys new devices and increasingly buys additional services.

We’re bearish on companies that are fundamentally challenged in pricing and a good bit of hope for the future. These include the oil frackers, heavy equipment manufacturers, our bubble basket of shorts and individual company-specific shorts. We generated a good underwriting result during the quarter. I just returned from our board meeting in Cayman, where we spent time discussing the 2016 underwriting plan and our strategic direction during the difficult 2015 we experienced. Despite that, the team is energized, and the first quarter of good results in a volatile environment sets Greenlight Re on the right path to an improved 2016 performance.

I look forward to seeing everyone next Thursday at Greenlight Re’s biannual meeting.

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