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The keys from the Greenlight Capital 4Q15 letter to investors includes a potential Macy’s (NYSE: M)takeover, its losses related to Micron Technology (NYSE: MU) and some other value names.
The hedge fund pointed out 2015 was “a difficult year for value stocks.” Greenlight also noted last year marked the fourth time in its history that it suffered outsized losses, saying, ”The macro environment was unfavorable to value investing.” An understatement to say the least, with Einhorn’s Greenlight down 20.2 percent in 2015.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
Other highlights from Greenlight’s letter to investors included:
Macy’s Could Be A Takeover Target?
Macy’s sales fell 5.2% to roughly $5.88 billion in the third quarter of 2015. Meanwhile, 2016 appears to be off to a rough starter for Macy’s, as the retailer said it intends to close between 35 to 40 of its stores in the near future.
Although shareholders may be frustrated with Macy’s, Greenlight sees opportunities for the retailer. In fact, Greenlight pointed out that Macy’s could be a viable takeover target this year.
“With the (Macy’s) stock closing the year at $34.98, the math might make more sense [for a takeover],” Greenlight wrote. “While it’s unlikely the management team will reverse course on its own, it wouldn’t surprise us if a private equity firm teamed up with a REIT to buy the company and unlock the value privately.”
His plan on getting PE and a REIT to team up is an interesting workaround for the new law making it hard for retailers and others to spin off REITs.
Greenlight “Failed To Monetize Gains” On Micron And SunEdison (SUNE)
Greenlight reduced its positions in Micron and SunEdison to 25% and 67%, respectively in 3Q15. However, Greenlight pointed out the moves may have been premature.
In particular, Greenlight’s moves involving Micron proved to be costly. On Nov. 16, 2013, Micron’s per-share price was $5.47. But the stock price doubled, then doubled again and again, eventually reaching $36.49 per share on Dec. 5, 2014.
“We failed to monetize nice gains in MU and SunEdison at what now look to be great prices,” Greenlight noted. “There are lots of simple theories about what went wrong and what we can or should do about it.”
Don’t Sleep On David Einhorn
Greenlight has returned 1,902% cumulatively to its investors since 1996. Overall, Greenlight has enjoyed consistent success. That 1,902% cumulative return is 16.5% annualized since 1996.
So what does the future hold for Greenlight? The hedge fund likely will continue to face a tough environment for value stocks but appears to be undeterred in its investing approach.
“In this instance, a few overvalued story stocks did well while most stocks – especially value stocks – declined,” Greenlight pointed out. “Our view is that over time, value investing is more successful than investment strategies that ignore value.” I’d say the most interesting thing in Greenlight’s portfolio right now is Mylan (MYL). His coal and solar plays may prove to be great plays, but the risk/reward seems more compelling in the pharma name. His thesis on Mylan — “We acknowledge eventual headwinds for the company’s branded EpiPen product, which could encounter competition from generics in late 2016. However, we see medium-term upside from a competitor recall, an announced share repurchase, and board review of corporate governance complaints.”