David Einhorn’s letter to his Greenlight partners, on one level a review of the first quarter results, is actually a wide-ranging discussion of the investment world today. Einhorn, the author of Fooling Some of the People All of the Time, can spin a tale, and he spins several here.
On those results: Greenlight suffered a small loss in the quarter because its short positions “lost a bit more than we made on our longs, and macro lost a little.”
Looking forward, Einhorn expects good things from Sunedison Inc (NYSE:SUNE), one of his “several new long ideas.”
The Long Side
Here is the SUNE stock chart [contrasted with the SPX as black line] over the month before the release of the Einhorn letter:
What is intriguing to Einhorn about SUNE, f/k/a MEMC? It has done what consultants (and activist investors) so often tell clients (and incumbent boards). It has sought to monetize its deadweight while concentrating on its core.
SUNE develops solar power plants both for businesses and utilities. Greenlight considers this its good business. Alas, until recently, this valuable core was saddled with two balance-sheet wrecking sidelines: the manufacture of wafers for semiconductor companies, and the assembly of solar modules for developers.
The company recently got itself out of the solar module business, and it’s “in the process of monetizing its semiconductor wafer business through an IPO.” It will focus on its solar power plants, where its costs are on the way down and its competitors’ costs (that is, the costs associated with fossil fuels) are on the way up.
The Short Side
On the other side, Einhorn explains that Greenlight has decided to create a “basket of bubble stocks” and go short the basket.
The markets are engaged in a new tech bubble, an echo of the infamous dotcom bubble of the 1990s. On a stock-by-stock basis, shorting a tech bubble is a tricky proposition, because it’s all about timing, and “twice a silly price is not twice as silly, it’s still just silly.” Even a stock that has reached a valuation well beyond anything its fundamentals can justify might, then, double in price before its eventual burst, in the meantime squeezing anyone who had shorted it simply because they (accurately) saw it as a bubble.
Thus, Greenlight is shorting the bubbilicious parts of the market through a “basket” approach in which each position taken by itself is a small one “thereby reducing the risk of any particular high flier becoming too costly.”
The widespread dissemination of Einhorn’s letter Tuesday afternoon, with its emphasis on the new tech bubble, may have thrown some cold water on the enthusiasm with which trading began Tuesday. The DJIA shot up in early trading, passing 4160 by noon. But by 2 the momentum was lost, and from there to the closing bell most movement was down.
A Lawsuit Lost in Germany
In litigation news, the letter updates investors about Greenlight’s recent loss in a German court. In 2008, Porsche repeatedly indicated that it had no intention of acquiring Volkswagen. Then late in the year it did in fact unveil a takeover plan. In 2009, given the global credit contractions, this plan backfired on Porsche as banks started calling in the loans they had made that were fueling the buy-up of VW shares. When the dust settled, Porsche had gone from acquirer to acquired: a VW brand.
VW and Porsche stock prices fluctuated wildly during all this. Einhorn says that Greenlight in particular had relied on public statements about Porsche’s intentions, “as well as additional discussions we had with Porsche’s head of investor relations” and it brought suit to recover damages.
Last month, though, a German court dismissed the case, saying (in Einhorn’s paraphrase) that it was “a valid business objective of Porsche to keep secret its goal to acquire 75% of Volkswagen at the lowest possible price, and that disclosure of its intentions would thwart that objective.”
The letter also gives a shout-out to Michael Lewis and his book Flash Boys. Although Greenlight is confident that it isn’t losing out to the abuses of HFT identified in that book, it does hold a small stake in IEX, the dark pool that many, including Lewis, see as an exemplary market-based response to those abuses.