David Einhorn‘s Greenlight Capital has filed its latest 13F with the Securities and Exchange Commission (SEC), disclosing its long equity positions at the end of 2014. The fourth quarter was a strong one for the fund, as it returned 5.6%, following a disappointing loss of 3.9% in the third quarter. That raised its full net year return to 8.0%. Although that paled in comparison to the fund’s annualized return of 18.9% since its inception, which is quite impressive, and was somewhat lackluster when compared with the 13.7% rise of the S&P 500, it did outperform the majority of hedge funds, which had returned just 2% through the end of November, as many funds were slow to react to plummeting oil prices.
David Einhorn is well known for his uncanny ability to pick the right companies to short sell. Betting on Lehman Brothers’ 2008 collapse in 2007 raised Einhorn’s credibility in this department to new heights. Moreover, Greenlight Capital doesn’t operate on leverage, or borrowed funds. The fund was founded in 1996 by Einhorn, who previously worked with Gary Siegler and Peter Collery at SC Fundamental Value Fund. A Cornell graduate, Einhorn is one of the most successful long/short equity hedge fund managers of the past decade. The fund currently has about 56.3% of its portfolio invested in information technology companies, with the fund’s portfolio 96% invested in long positions, and 66% in short positions.
Greenlight Capital’s 2014 fourth quarter investor letter highlighted some of the areas where the investment thesis of the fund managers paid off, and highlighted key investments which will drive future returns for the hedge fund. Among the most profitable long ideas with a significant holding was the fund’s stake in Apple Inc. (NASDAQ:AAPL), which was up 10% in the fourth quarter. Although Greenlight decreased its position in the Cupertino, California-based company by 566,500 shares, it is still the fund’s second largest holding, as its 8.61 million shares total 12.62% of the value of the fund’s portfolio.
Considering the sales figures of the iPhone 6 and the earnings multiple of the stock of just 14 times 2015 earnings estimates, along with less than 12 times net of cash, (based on the $110.38 stock price, at the time the investor letter was published), Einhorn believed that the company was still cheap. Other investors, like outspoken activist Carl Icahn firmly agree, with Icahn claiming Apple Inc. (NASDAQ:AAPL) shares should be $200, and pressuring the company to continue increasing shareholder value by buying back stock with their excess piles of cash, which totaled $178 billion (cash and marketable securities) at the end of the year.
Apple Inc. (NASDAQ:AAPL) has continued to perform exceptionally into 2015, up 15.13% year-to-date, and flying well past the $700 billion level in terms of market cap. All eyes are on the company and its stock now as it has the potential to become the first company in history valued at $1 trillion. While there’s still a ways to go yet, the potential is there, and Einhorn and many others remain along for the ride.
Among the short ideas that did wonders for Einhorn, as far as fourth quarter performance is concerned was United States Steel Corporation (NYSE:X). The short bet on the integrated steel producer turned out to be a profitable venture for Einhorn, as shares fell from $39.17 to $26.74 during the fourth quarter, a 47% drop. The reasoning behind the investment, according to the investor letter, lay in the belief that management of the company had engineered the perception of a steel shortage, which caused the stock price to soar. The trend reversed in the fourth quarter and Greenlight Capital was able to pick up hefty gains. The fund believes that although the stock might be cheap at current levels, considering the estimated 2015 EPS of $3.10, that the company might have difficulty meeting that forecast given the current outlook for steel.
Despite a declining stock, which has persisted into 2015, down another 1.42%, United States Steel Corporation (NYSE:X) did report its highest full year net income for fiscal year 2014, since 2008, with $102 million in earnings, $0.62 per diluted share, while fourth quarter income was $275 million, or $1.83 per diluted share. United States Steel has projected adjusted income from operations for 2015 to be between $550 million and $850 million.
Among the new and promising positions that Greenlight Capital has initiated during the fourth quarter are Time Warner Inc (NYSE:TWX) and Keysight Technologies Inc (NYSE:KEYS). Time Warner’s stake comprises nearly 3.79 million shares and amounts to 4.31% of the fund’s portfolio value. The idea behind this investment was that the media and entertainment company would have to better monetize its premium cable network (HBO) and cut costs across the company, if they are to fend off another activist advance from Rupert Murdoch, after his July bid failed to materialize.
Time Warner Inc (NYSE:TWX) did just that, subsequently announcing that it would offer HBO in the United States as a standalone streaming product, while further undertaking a number of other initiatives that have increased earnings estimates and sent shares soaring, including the purchase of German music-streaming service SoundCloud in November. Greenlight acquired its Time Warner position at an average price of $72.72, and shares closed the year at $85.42.
Acquiring 4.46 million shares of Keysight Technologies Inc (NYSE:KEYS) is another venture that Greenlight embarked on in its fourth quarter. Forming nearly 2% of the fund’s portfolio value, Greenlight believes that Keysight was the main cash flow source for Agilent Technologies Inc (NYSE:A), from which it was spun off in November. The tech company’s prospects were summarised in the investor letter as follows:
We expect that as an independent company starting with an almost unlevered balance sheet, KEYS will have the flexibility to invest in unexploited growth initiatives and make better R&D and capital allocation decisions. We believe the Street doesn’t fully appreciate KEYS’ prospects. We purchased our position at an average price of $30.54, or about 12x near-term EPS, which doesn’t yet benefit from the investment spend.
Keysight Technologies Inc (NYSE:KEYS) ended the year at $33.77 and has soared another 9.19% year-to-date, to $36.49, nearly a 20% return for Greenlight thus far. Keysight has announced a number of new technology products in recent days, including the Keysight IntegraVision power analyzer for use by R&D engineers in designing and testing electronic power conversion systems, two new FieldFox handheld analyzers, and a Satellite Signal Monitoring Reference Solution for engineers to quickly validate the potential integrity of a satellite signal.
Lastly, Micron Technology, Inc. (NASDAQ:MU) remains Einhorn’s top pick at the close of the year. Einhorn increased his position in Micron by 2% during the quarter, to 31.26 million shares. That position was worth $1.09 billion at the close of 2014, 14.54% of his fund’s $7.52 billion equity portfolio. This position, which was initiated in the fourth quarter of 2013 and was 47.7 million shares strong at the time, was a big winner for Einhorn in 2014. Shares rose 64.5% for the year, and Einhorn took profit from the position by selling off just over 33% of it throughout 2014.
However, Seth Klarman‘s Baupost Group cut its stake in Micron Technology, Inc. (NASDAQ:MU), once by far its largest, by 62% during the fourth quarter, selling off 31.95 million shares, and there is reason to believe Micron may have peaked, as there are fears that some of its technologies like 3D NAND are falling behind the curve, and that Samsung will depreciate memory chip values with a flood of excess supplies. Shares are down 9.03% year-to-date, partially on lower forecasted DRAM and NAND output in 2015.
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