We are confident that the first thing readers will be curious to look for in Greenlight’s latest just released first quarter letter is David Einhorn’s take on his investment in the now bankrupt former hedge fund hotel, SunEdison. Einhorn’s spares no self-criticism here: “SunEdison (SUNE) collapsed from $5.09 to $0.54. In January we negotiated with the company to add an independent director to the board. Unfortunately, and to our surprise, the patient was already in terminal condition. Obviously, we underestimated the fragility of the situation.” Concise, brief, and to the point.
With that out of the way, this is how Einhorn’s described the Q1 environment.
It has been a while since we’ve had a profitable quarter to report. Though we would like to make it a habit, trying to manage for quarterly results is really not our philosophy. We think one of our advantages is the ability to be more patient than others, especially as investment horizons appear to be getting shorter.
It was a strange quarter. The S&P 500 spent the first half of the quarter going straight down. Then in the spirit of “never mind”, it turned on a dime, recovering all of the loss and then some. Continuing the game of lower and beat, most companies beat low-balled fourth quarter estimates and many further lowered targets for 2016. In 2015, the S&P 500 companies collectively earned $117, which was 6% less than expected at the beginning of the year.
Yet each quarter when companies reported, earnings were about 3% higher than expected, with roughly two-thirds of the companies exceeding estimates. Impressively, there were 32 companies in the S&P 500 that earned less last year than was expected at the beginning of the year, and reduced expectations for 2016, while somehow managing to report positive surprises every quarter in 2015.
2016 looks to be more of the same. Since the beginning of the year, bottom-up consensus estimates for S&P 500 earnings have fallen from $126 to $120. Companies are again poised to succeed at clearing a continually falling bar.
Hardly as “catastrophic” as Loeb’s take in his letter from last week, but not that much better either.
While we know Einhorn’s biggest loser, his winners were the following: Consol Energy, Michael Kors, the bubble basket of shorts (which declined by 13%), and of course, gold. This is what he said about the precious metal:
Gold advanced from $1,061 to $1,233 per ounce for a number of reasons. Foreign central banks implemented even more aggressive, and in our view, counter-productive monetary policies. Also, the U.S. Federal Reserve reduced its forecast for future rate hikes in response to a variety of fears/rationalizations including foreign exchange rates, corporate credit spreads, and equity market volatility. Notably, the Fed’s “data dependency” doesn’t appear to relate to employment, which continues to improve, or core inflation, which is now running above its 2% target. We believe the increasingly adventurous monetary policy is bullish for gold.
Among the other notable highlights from the letter is that Greenlight has opened a new long in Yelp and a new position in PVH Corp, as well as reinitiating positions in American Capital Agency and Hatteras Financial.
On the topic of his shale nemesis Pioneer, he had this to say: “We recently read the Pioneer Natural Resources (PXD) annual Form 10-K. We are amazed at how little conversation it has provoked. Rarely have we seen a company where management’s investor presentations are so disconnected from the company’s SEC filings.”
There is much more in the full letter (see below) and we are confident we will hear much more on Einhorn’s investment thesis during Wednesday’s Ira Sohn conference.
Full Greenlight letter.
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