David Einhorn’s Greenlight Capital loved a sturdy return of 36.6% web in 2022, considerably outperforming the S&P 500’s 18.1% plunge. Since its inception in Could 1996, Greenlight Capital has returned 2,358.3% for an annualized return of 12.8% web. Over the identical timeframe, the S&P 500 gained 864% for an annualized return of 8.9%.
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Worth investing might by no means get better
Of their 2022 year-end letter to buyers, the Greenlight Capital group stated the yr was their finest ever in some ways, drawing comparisons between 2022 and 2001. The final know-how bubble popped in 2001, however the market did not backside out till 2009.
The group famous that the “huge bull market” that persevered between 2009 and the market’s high towards the tip of 2021 culminated in a “large bubble,” particularly in essentially the most speculative shares. They really feel most buyers throughout this timeframe both by no means included valuation of their funding course of or ceased to incorporate it.
On one hand, Einhorn’s group warned that worth investing in all probability will not ever get better from the “debilitating” outflows that shifted to passive or different methods. Nonetheless, on the opposite, they really feel the tremendously decreased quantity of competitors for worth shares will give their technique a lift.
2022 returns
Einhorn’s group believes their unwillingness to take the dangers most different buyers dove into enabled them to outperform in 2022. Because of this, they questioned whether or not the dangers that drove important outperformance for a lot of buyers through the bull run have been value taking.
In 2022, Greenlight Capital’s lengthy positions returned 2.4% with 30.2% alpha, whereas its shorts returned 30% with 15% alpha. The fund’s index hedges gained 5% whereas shedding 0.1% alpha, whereas its macro positions gained 5.7% with 5.8% alpha.
2022 was one of the best yr for the macro portfolio, with the 2 important winners being rates of interest and inflation swaps. The fund had wager that the Federal Reserve would tighten greater than the market had anticipated. It had additionally wagered {that a} mixture of reported inflation and expectations would rise greater than anticipated.
New place: Tenet Healthcare
THC
THC
Though Einhorn’s group believes we’re in the course of a bear market, Greenlight established a brand new medium-sized lengthy place in Tenet Healthcare through the fourth quarter. The corporate operates hospitals and ambulatory surgical procedure facilities.
Over the previous couple of years, Tenet has grown and shifted its enterprise combine towards its higher-margin outpatient surgical procedures, enabling it to generate important money flows that Greenlight believes are sustainable. In 2022, the corporate lower its steering because of COVID and inflationary headwinds, sending its shares plunging by greater than 50% via late October.
The fund believes that pullback offered a sexy alternative to faucet into Tenet’s transformation. They count on its development in ambulatory surgical procedure facilities to stay sturdy as its decreased hospital portfolio improves in each prices and volumes.
Einhorn bought its Tenet shares between late December and early January at a mean worth of $48.61, or 8.7 occasions the corporate’s 2023 consensus estimates. The corporate lately introduced its plan and began to repurchase about 20% of its excellent shares by the tip of 2024.
Inexperienced Brick Companions
Inexperienced Brick Companions and Danimer Scientific have been Greenlight’s solely two important shedding positions on the lengthy aspect. Inexperienced Brick generated strong working ends in 2022, though the difficult forward-looking macro outlook attributable to greater rates of interest greater than offset these outcomes.
Greenlight expects the corporate to earn $6.02 per share when all the outcomes for 2022 are in, versus the estimate of $4.29 per share originally of the yr. Nonetheless, Einhorn’s group famous that the 2023 estimates have declined from $4.62 to $3.17 per share, which despatched Inexperienced Brick shares plummeting.
They count on the inventory to do higher this yr after the market decides the estimates have sufficiently priced within the slowing housing market. At that time, the Einhorn believes the main target will shift to figuring out the proper a number of for Inexperienced Brick on trough earnings. They really feel the corporate is well-positioned as a low-cost operator in demographically enticing markets.
Danimer Scientific
Greenlight Capital has written about Danimer Scientific on and off for a number of quarters. In 2021, the fund shifted most of its place from the corporate’s frequent shares to its convertible bonds, however later in 2022, it added to its inventory place. Sadly, Danimer Scientific’s bonds and inventory each had a horrible yr.
On one hand, the Greenlight group admits Danimer Scientific is a cash-burning know-how SPAC. Because of this, it is not stunning that the corporate’s securities have plummeted alongside these of different unprofitable know-how SPACs.
Nonetheless, the fund stays satisfied that Danimer Scientific has a viable product and may stay solvent. They identified that the corporate’s converts are buying and selling beneath 40% of par, and its market cap has plunged beneath $200 million. Thus, there may be plenty of optionality if the thesis finally ends up being appropriate.
Huge winners in 2022
The massive winners on the lengthy aspect in 2022 have been Atlas Air Worldwide, CONSOL Vitality, Rheinmetall, Teck Sources, Twitter and the privately held Siltstone Capital.
CONSOL Vitality rode the hovering coal costs from $22.71 to $65 per share and paid $2.05 per share in dividends. The corporate ended the yr with no web debt. In 2023, the fund’s administration expects CONSOL to see a lot greater earnings and important free money stream, most of which can be returned to shareholders.
David’s non-public holding, Siltstone Capital, provides autos that spend money on Utica and Marcellus shale mineral rights. The fund loved sizable positive factors from these holdings through royalties spurred greater by the 46% enhance in 2022-2026 common Henry Hub pure fuel costs and an improved outlook for drilling exercise.
In the meantime, Tech benefited from greater metallurgical coal costs and expectations of its new copper mine coming on-line towards the tip of 2022. The inventory rose from $28.82 to $37.82 per share. Teck’s 2022 earnings are anticipated to return in at $7.15 per share, a lot greater than the $4.68 per share estimated originally of the yr.
Rheinmetall benefited from the broad-based re-rating of protection shares following Russia’s invasion of Ukraine. David bought the shares in 2022 after a large acquire. The agency additionally exited Atlas Air Worldwide after it agreed to be bought to a personal fairness consortium.
Lastly, Elon Musk closed his acquisition of Twitter at $54.20 per share, as Einhorn’s group had predicted, taking the corporate non-public. Twitter was the fund’s third-largest contributor in 2022.
Bubble basket
Lastly, the group outlined their long-standing bubble-basket brief technique, which boosted their 2022 returns considerably. They outline bubble shares as people who might fall at the very least 80% and nonetheless not look low-cost to them. The fund’s purpose to brief speculative shares simply because the bubble seems to have popped.
Whereas the fund has maintained its bubble-basket technique on and off since 2014, it initiated its fifth such basket in January 2022, when it shifted from cautious to bearish. Greenlight included 31 shares in its basket with a 6% mixed brief place in 2022. The basket stays in place. As of the tip of 2022, 12 of the shares had plunged at the very least 50%, and just one was constructive, with a 23% acquire.
David additionally maintains its wanting the elements of an actively managed ETF of so-called “innovation” shares. The fund’s administration thought the ETF’s elements shared related traits with the names they included of their bubble baskets. The fund shorted this basket in early 2021 and later ramped the place to 9% of capital. The basket has plummeted 76% because the fund’s preliminary entry.
