Three Tech Giants and a “Mother Fracker”: Recap of Billionaire David Einhorn’s Top Short Bets

Billionaire David Einhorn and his fund, Greenlight Capital, are among the most watched on Wall Street, mainly due to their stellar returns, which amounted to 19.5% on an annualized basis between the fund’s inception in 1996 and 2013. However, Greenlight has been lagging so far this year, as it returned 3.8% in the first nine months of 2016, according to the fund’s third-quarter letter to investors, versus the S&P 500’s gain of 7.8%.

Among the reasons for Greenlight’s weak performance were the losses registered by Apple Inc (NASDAQ:AAPL) in the first half of the year and its short bets against some of the year’s top-performing stocks, such as Amazon.com, Inc. (NASDAQ:AMZN). Further below, we’ll discuss in more detail some of Greenlight’s short-bets and will see what Einhorn said about some of these stocks in his recent letter.

Greenlight is one of some 750 funds that we track at Insider Monkey whose equity portfolios we analyze every quarter in order to identify stocks that they are collectively bullish on. Since these investors can take advantage of more resources and employ better skill at picking stocks, we believe that following them into their most popular long picks, particularly in the small-cap space, allows smaller investors to beat the market. Our theory is also supported by extensive backtests that represent the basis of our small-cap strategy (see more details).

Let’s start with discussing some of Einhorn’s short bets, one of which is likely Tesla Motors Inc (NASDAQ:TSLA). Even though Einhorn has not said that he is short the stock, the tone of his commentary suggests so. In the latest letter, Einhorn mentioned that CEO Elon Musk manages to keep investors’ attention away from the company’s problems through his “ability to spin a yarn and keep a story going”. Einhorn also quoted Dave Pell, editor of NextDraft, who said:

“It’s pretty amazing that we live in an age when a CEO of two public companies can give a talk about colonizing Mars and shareholders don’t see that as a warning signal.”

It’s not the first time that Einhorn has hinted at a position in Tesla Motors Inc (NASDAQ:TSLA) without directly saying whether or not he is actually short the stock. In his second-quarter letter, the investor choose to end with a quote from Adam Jonas, which said: “We believe Tesla’s most valuable asset may be the trust it has built with its providers of capital.”

Tesla Motors Inc (NASDAQ:TSLA)’s stock is down by over 17% so far this year, but it doesn’t keep Elon Musk from continuing to promote his idea of a world dominated by renewable energy. Tesla announced earlier this year that it wants to acquire SolarCity Corp (NASDAQ:SCTY), a move that many investors voiced concerns about. Moreover, just last week, Tesla made headlines after Elon Musk presented the company’s latest product, a solar roof, which consists of roof tiles made of textured glass containing solar cells. The idea is that the tiles will manage to preserve the aesthetics of a house compared to the traditional “after-market” solar panels and will cost less than the cost of a traditional roof and electricity acquired from the grid. Tesla Motors Inc (NASDAQ:TSLA) plans to begin installation of the solar tiles next summer, but its likely that the project also counts on the successful acquisition of SolarCity Corp (NASDAQ:SCTY).

On the following page, we will continue our discussion with two other tech stocks as well as one oil company that Einhorn has been betting against for a while.

Two other stocks that Einhorn is likely shorting are Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX), although the fund did not mention anything about either of them in the latest letter. In his second-quarter letter, Einhorn pointed out that Amazon was the second-largest detractor to the fund’s performance due to the company posting better-than-expected results and the trends haven’t changed much, as Amazon.com, Inc. (NASDAQ:AMZN) soundly beat both top- and bottom-line estimates in its second-quarter report, although for the third quarter, its EPS of $0.52 was lower than the expected $0.78 and revenue of $32.70 billion was only $10 million above the estimates. Einhorn first disclosed shorting Amazon.com, Inc. (NASDAQ:AMZN) in his investor letter for the first quarter of 2014 and the stock has more than doubled in value since then. However, it should be pointed out that it’s not entirely clear whether or not Greenlight maintained its short position in Amazon.

Greenlight initiated a short bet against Netflix, Inc. (NASDAQ:NFLX) back in the second quarter of 2015 and the last time the position was mentioned was at the fund’s annual meeting in January, according to Bloomberg. Back in 2015, in his second-quarter letter, Einhorn expressed his dislike towards the company’s original series “House of Cards” and expressed his perplexity about the market’s positive reaction to the disappointing financial results that Netflix reported for the first quarter of 2015. At the annual meeting in January, Greenlight pointed out that Netflix would “need price increases” and Netflix, Inc. (NASDAQ:NFLX) has done just that this year, as it announced plans to shift all of its customers to the standard $9.99/month plan. As is the case with the previously-mentioned Amazon, it’s not certain if Greenlight has remained short on Netflix since it was last mentioned.

Let’s now switch from tech and talk about oil, particularly an oil company that Einhorn likes to call the “mother fracker”. If you follow Einhorn’s activity, you’ll immediately understand that this company is Pioneer Natural Resources (NYSE:PXD) and Einhorn has been betting against this stock for over a year. Since Einhorn called Pioneer the “mother fracker” at the Sohn Conference in May 2015, the stock is up by just 6%, but it has surged by over 30% year-to-date. Nevertheless, Einhorn and his team are still not buying it. In the third-quarter letter to investors, Einhorn called out Pioneer CEO Scott Sheffield’s claim that the company’s operating cost for the Permian horizontal well has been lowered to almost $2 per BOE, which, according to the executive, suggests that Pioneer Natural Resources (NYSE:PXD) can compete even with Saudi Arabia. Einhorn said that the information was dismissed by Forbes, which said that Pioneer’s total variable cost per barrel in the second quarter amounted to $18.

Moreover, the investor discussed with a number of industry representatives operating in the Permian basin and said that they “couldn’t find anyone who believed the $2 claim.”

“Perhaps the company is capitalizing operating costs; perhaps it is operating its own service company at a loss for intercompany accounting purposes; probably it is excluding salt water disposal costs; and almost certainly PXD is counting only the newest wells that are benefitting from very high initial flow rates. We don’t really know, but we can’t find any support for the idea that the Mother-Fracker has long-term sustainable operating costs approaching $2 per BOE,” Einhorn said.

Do other hedge funds agree with Einhorn?

It’s hard to say how many investors agree with Einhorn on his short positions, since these bets are not publicly disclosed and only a few fund managers speak in public about the stocks they are shorting. We know for sure that Jim Chanos of Kynikos is shorting Tesla Motors Inc (NASDAQ:TSLA), as he said that on numerous occasions. We also know that Greenhaven Road Capital is shorting Tesla, as it revealed in its own third-quarter investor letter (we’ll be covering that letter in detail later this week). We can also assume that even though investors may like Elon Musk and his initiatives, many of them consider the stock overvalued. Among the funds in our database, 36 funds amassed just 4% of the company’s outstanding stock at the end of June, and at the same time, 21 funds held “Put” options underlying shares of Tesla.

On the other hand, Amazon.com, Inc. (NASDAQ:AMZN) enjoys more confidence from the investors in our database, as it was the second-most popular stock, trailing only Facebook Inc (NASDAQ:FB). At the end of the second quarter, 145 funds held 5.90% of Amazon’s outstanding stock, compared to 133 funds that held shares a quarter earlier. Netflix, Inc. (NASDAQ:NFLX) registered a decrease in popularity, as the number of investors holding shares slid by 10 to 54 funds that amassed roughly 9.50% of the company’s float.

Finally, the growth that the “mother fracker” registered so far this year helped it score points with smart money investors. In this way, 74 funds held shares of Pioneer Natural Resources (NYSE:PXD), which represented 14.40% of its outstanding stock at the end of June; this compares with 61 funds that reported long positions as of the end of the first quarter.

Disclosure: None