Greenlight Capital Investor Letter: Q2 Performance and Highlights

Hedge fund Greenlight Capital, co-founded by well-known money manager David Einhorn in 1996 with $900,000 from friends and family, suffered its worst year since the financial crisis in 2015. The multi-billion-dollar hedge fund fell by 20% last year on the back of a mix of bad investments, including its bullish bet on Sunedison. Mr. Einhorn’s pool of funds are performing much better this year. The Greenlight Capital funds inched down by 2.6% net of fees and expenses in the second quarter of 2016, bringing the funds’ return for the first half of 2016 to 0.4%. 2015 was Greenlight Capital’s second losing year in the firm’s almost 20-year history, which is one of the primary reasons investors should monitor the firm’s moves and commentaries.

In a July 26 letter to investors, the asset manager played down the impact of the United Kingdom’s decision to leave the European Union, saying that the so-called Brexit “will not be a significant economic event” as the U.K. economy is too small to “have a large direct impact on global trade”. “However, the mere pretense of an event is likely sufficient to entice the global monetary authorities into serving up a fresh course of Jelly Donuts”, said the letter to investors. Leaving the discussion about the possibility of more monetary easing, let’s lay out several major moves completed by Mr. Einhorn and his team during the second quarter as revealed in the aforementioned letter to investors.

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Greenlight Capital Jettisons Stake in Baxter International Inc. (NYSE:BAX)

– Shares owned by Greenlight Capital as of March 31: 1.20 Million

– Value of Greenlight Capital’s holding as of March 31: $49.24 Million

Greenlight Capital upped its position in Baxter International Inc. (NYSE:BAX) by 695,163 shares during the first quarter of 2016 to 1.20 million shares. According to the July 26 letter to investors, the multi-billion-dollar asset manager sold out its entire position in Baxter during the second quarter “at a gain when the shares reached our view of fair value”. Baxter spun-off its biopharmaceutical business last summer into a separate company called Baxalta, which was acquired by Shire PLC (ADR) (NASDAQ:SHPG) for $32 billion in June. Baxter remains one of the biggest medical equipment companies, generating roughly $10 billion in annual sales from kidney care and hospital products. Baxter shares have gained an impressive 25% since the start of 2016, reflecting strong financial performance in the first half of the year. Just recently, the company increased its sales and earnings per share outlook for full-year 2016, after second-quarter worldwide sales grew 4% year-over-year to $2.6 billion. Dan Loeb’s Third Point LLC acquired a new stake of 53.85 million shares of Baxter International Inc. (NYSE:BAX) during the first quarter.

CONSOL Energy Inc. (NYSE:CNX) – Significant Winner in Greenlight’s Portfolio

– Shares owned by Greenlight Capital as of March 31: 29.61 Million

– Value of Greenlight Capital’s holding as of March 31: $334.29 Million

CONSOL Energy Inc. (NYSE:CNX) was the sixth-largest position in Greenlight Capital’s portfolio at the end of the March quarter, accounting for 5.7% of the entire value of the portfolio. CONSOL Energy was one of the hedge fund’s biggest winners in the second quarter, along with gold and gold stocks, with the stock gaining 43% during the three-month period. The diversified energy producer in the Appalachian Basin, producing both natural gas and high-BTU coal, has seen the value of its stock skyrocket by 132% since the beginning of the year, reflecting “a partial recovery in natural gas prices and continued strong well performance”. Although the aforementioned letter does not state whether Greenlight Capital reduced or increased its stake in CONSOL Energy during the second quarter, the CONSOL position was the third-largest long position in the firm’s portfolio. In early June, Mr. Einhorn’s firm reported the sale of exactly 7.0 million shares at $15.01 apiece, cutting its overall holding to 22.44 million shares. Mason Hawkins’ Southeastern Asset Management was the owner of 52.15 million shares of CONSOL Energy Inc. (NYSE:CNX) at the end of March.

Greenlight Reiterates Bullish Thesis on Chemours Co (NYSE:CC)

– Shares owned by Greenlight Capital as of March 31: 8.84 Million

– Value of Greenlight Capital’s holding as of March 31: $61.90 Million

The multi-billion-dollar asset manager upped its stake in Chemours Co (NYSE:CC) by 5.44 million shares during the March quarter to 8.84 million shares. The upped stake was valued at $61.90 million at the end of the quarter. In the freshly-revealed letter to investor, Greenlight Capital said chemicals company Chemours “should benefit from the continued recovery of TiO2 [titanium dioxide used in the food and cosmetic industries] prices” despite being attacked by short sellers. In June, prominent short-seller Andrew Left published a report saying that the company was “set up for bankruptcy” due to legal issues related to a discontinued product, putting pressure on stock performance that enabled Greenlight Capital to boost its stake in Chemours. Greenlight Capital rebuffed the short-seller’s analysis that Chemours was designed for bankruptcy, saying that the former parent company of the chemicals company remained the primary defendant in all the litigation related to the manufacturing of a chemical called C8 or PFOA. Chemours shares are up 73% so far in 2016 and could go higher as “investors refocus on the earnings power of the business”.

Greenlight Discards Macy’s Inc. (NYSE:M) Stake

– Shares owned by Greenlight Capital as of March 31: 7.06 Million

– Value of Greenlight Capital’s holding as of March 31: $311.12 Million

The hedge fund vehicle run by billionaire David Einhorn increased its exposure to Macy’s Inc. (NYSE:M) by 4% during the January-to-March quarter to 7.06 million shares. However, the hedge fund sold out its entire stake in the omnichannel retail organization during the second quarter “for a loss after the company announced a significant reduction in full-year 2016 guidance”. “This announcement invalidated our thesis that 2016 earnings would benefit from easy comparisons later in the year”, said the recent letter to investors from Greenlight Capital. Macy’s, which owns and operates roughly 870 Macy’s, Macy’s Backstage, Bloomingdale’s, Bloomingdales Outlet and Bluemercury stores, reported net sales of $5.77 billion for the first quarter, down 7.4% year-over-year due to store closures and a decline in comparable sales. The decrease in comparable sales was 6.1%, more than the 5.6% decline recorded for the first quarter of 2015. Macy’s shares are 5% in the green year-to-date. Ray Carroll’s Breton Hill Capital owns nearly 26,000 shares of Macy’s Inc. (NYSE:M) as of June 30.

Apple Inc. (NASDAQ:AAPL) Losses Mitigated by Trading Activities

– Shares owned by Greenlight Capital as of March 31: 8.21 Million

– Value of Greenlight Capital’s holding as of March 31: $895.14 Million

Apple Inc. (NASDAQ:AAPL) was Greenlight Capital’s largest holding at the end of the March quarter, making up 15.2% of the hedge fund’s portfolio. The asset manager upped its Apple position by 30% during the first quarter to 8.21 million shares, which were valued at $895.14 million at the end of the quarter. Greenlight Capital mitigated the loss incurred from the long position in Apple “by trading AAPL well”. “…though the stock is down about 9% for the year, we have been nearly break-even on the position in 2016”, said the well-known investment firm in the letter to investors. Apple shares jumped above the $100 price level again after the iPhone maker released better-than-expected results for its fiscal 2016 third quarter that ended June 25. Apple’s revenue dropped 15% year-over-year to $42.4 billion, beating analysts’ estimates of $42.1 billion. The company sold 40.4 million iPhones during the quarter, above the 40.2 million units-figure anticipated by analysts. Ken Fisher’s Fisher Asset Management has 11.31 million shares of Apple Inc. (NASDAQ:AAPL) among its holdings as of the end of the second quarter.

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