Greenlight Capital, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly return of -2.6% was recorded by the fund for the third quarter of 2021, compared to the 0.6% for the S&P 500 index. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Greenlight Capital, in its Q3 2021 investor letter, mentioned Brighthouse Financial, Inc. (NASDAQ: BHF) and discussed its stance on the firm. Brighthouse Financial, Inc. is a Charlotte, North Carolina-based life insurance company with a $4.3 billion market capitalization. BHF delivered a 44.84% return since the beginning of the year, while its 12-month returns are up by 59.05%. The stock closed at $52.44 per share on October 22, 2021.
Here is what Greenlight Capital has to say about Brighthouse Financial, Inc. in its Q3 2021 investor letter:
“BHF reported what can only be called a stupendous result. BHF had adjusted operating earnings of $5.05 per share during the quarter compared to estimates of $3.28 per share. Full-year consensus moved from $13.75 to $16.18. The stock fell about 1% during the quarter to close at $45.23.
There is more to the story. BHF’s core business is variable annuities and to a lesser extent life insurance. But it also has something called a “closed block,” which is a bunch of legacy businesses that MetLife burdened BHF with at the time of the spin-off. These are business lines which are no longer being originated. BHF has them contained in a Delaware subsidiary for which there is minimal financial disclosure.
Skeptical investors have worried that this subsidiary could be a “black hole” that will drain the value from the rest of BHF. Well, something very strange happened to that theory this quarter: the regulators approved a $600 million dividend out of the Delaware subsidiary. Management, true to form, has given no hints as to what extent there will be more dividends to come.
To us, it seems that what was suspected to be a “black hole” is actually a “cookie jar.” We just don’t know how many cookies are in the jar. Either way, the consensus view that the run-off business will be a drain ought to be discarded.
$600 million is a lot of money. To BHF, it equates to more than $7 per share. Nobody expected this development. There are 11 analysts following BHF (1 buy, 7 holds, 3 sells), and not one of them changed their view of value based on this announcement. Moreover, one would think that if you found $600 million under the mattress, you would count that and ask whether anyone checked the couch cushions as well. But, as David noted, companies can report stupendous news…
We could go on and detail the quarterly results of several other companies in our portfolio, but we don’t wish to overkill the point.
It’s more productive to discuss how we think this situation will resolve itself. Share repurchases over time will unlock the value. We just don’t know when the market will notice. Going back to the BHF example, the company has already shrunk its share count by 30% from 120 million to 84 million. This has helped take stated book value per share from $120 to $175. In the most recent quarter, BHF authorized another $1 billion in buybacks, which is about a quarter of the company at the current price. As BHF continues in this fashion, eventually either the shares will re-rate or there won’t be many left.
We continue to hold the quaint view that shares represent a fractional ownership of a business. As the denominator of shares goes down, the fraction of the business that each share represents goes up. There are several companies in our portfolio, BHF included, that appear poised to return their current market caps to shareholders over the next few years.”
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Based on our calculations, Brighthouse Financial, Inc. (NASDAQ: BHF) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. BHF was in 26 hedge fund portfolios at the end of the first half of 2021, compared to 28 funds in the previous quarter. Brighthouse Financial, Inc. (NASDAQ: BHF) delivered a 25.70% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
