How David Einhorn Plans To Win In 2016

After losing over 20% in 2015, David Einhorn is back with a vengeance. 

For Einhorn’s Greenlight Capital hedge fund, 2015 was only the fourth time in its history that it experienced what it calls outsized losses — the previous three being in 1998, 2000 and 2008. 

#-ad_banner-#Many have been quick to write off Einhorn, criticizing him for owning some of the worst performing stocks in the S&P 500 during 2015, including SunEdison (Nasdaq: SUNE) and CONSOL Energy (NYSE: CNX). 

But since starting Greenlight in 1996, Einhorn’s fund has managed to generate an annualized return of 16.5%. Einhorn is one of the best investors around, and for good reason. 

So how will he be positioning himself to beat the market in 2016? Here are his recent moves: 

These Big Names No Longer Make The Grade
First and foremost, Einhorn sold off a large chunk of his top holding, Apple (Nasdaq: AAPL). He dumped 44% of his stake during the fourth quarter of 2015. 

Einhorn has been an Apple bull since 2010, when he first purchased shares. And since the third quarter of 2013, Apple has made up more than 10% of the Greenlight Capital portfolio. But shares of Apple are down 24% over the past year and appear to be facing some key headwinds, including the potential slowing of smartphone growth. 

Einhorn also finally sold all of his Micron Technology (Nasdaq: MU) stock, which he’d owned since the third quarter of 2013. In mid-2015, Einhorn noted that Micron could be worth more than Netflix (Nasdaq: NFLX) in the next few years. But Micron turned out to be one of the worst performing S&P 500 stocks in 2015. Einhorn rode Micron shares from the mid-teens in 2013, all the way to over $35 a share last year, then watched the stock tumble to single digit territory earlier this year. 

Increasing Stakes In Two Bullish Picks
Perhaps Einhorn’s most bullish action heading into 2016 was its increased stake in Time Warner (NYSE: TWX). Greenlight increased its Time Warner stake by 70% last quarter, making it one of the group’s largest three holdings. 

Shares of the cable company are down 20% in the last twelve months. This comes as the entire media industry is seeing pressure related to consumers opting out of cable subscriptions. However, Time Warner still has a strong broadcast network with valuable sports rights, not to mention the fact that it owns HBO, which has been the topic of spinoff speculation. 

In addition to Time Warner, Einhorn is making another media bet — adding 34% to his 21st Century Fox (Nasdaq: FOXA) stake in the fourth quarter.

It’s interesting to note that Fox tried to buy Time Warner in 2014 for $85 a share, but Time Warner rebuffed the offer. Time Warner currently trades at $65 and there’s fresh speculation that Fox is once again interested in buying the company. 

New Blood In The Top 10 
And of course, Einhorn has wasted no time in setting up his portfolio for redemption in 2015, and this includes bringing in some fresh blood. He’s added two new stocks to his top 10 holdings: Macy’s (NYSE: M) and Mylan (Nasdaq: MYL)

Einhorn’s Greenlight Capital owns just over 2% of Macy’s outstanding shares and is invested at around $46 a share. This is the same stock that fellow billionaire and activist investor, Jeff Smith of Starboard Value, is taking on. Starboard is pushing for Macy’s to unlock shareholder value by either spinning off or forming joint-ventures for its owned real estate. In fact, hedge fund Starboard has said Macy’s shares could be worth up to $125 a share.

Einhorn himself has said that Macy’s is cheap, with a strong balance sheet. Einhorn has also laid out an interesting thesis — one that’s somewhat akin to Starboard’s take. Einhorn thinks that a real estate investment trust could partner with a private equity company to take Macy’s private. 

Shares of pharmaceutical company Mylan are down 20% over the past year after the company rejected a takeover bid from Teva Pharmaceuticals (NYSE: TEVA). Mylan even tried to buy drug maker Perrigo (NYSE: PRGO) to help spoil the Teva takeover. Both deals fell through, but Mylan shareholders still appear disturbed by Mylan’s unusual takeover defenses and poor corporate governance.  

Einhorn notes that Mylan has some headwinds related to its EpiPen, which should see increased competition this year; but nonetheless, there is upside that could more than offset that issue, namely share buybacks and a recent competitor recall. Greenlight invested in Mylan at around $45 a share and sees material earnings growth through 2018 — thanks to its robust pipeline.



Greenlight Capital Top 10 U.S. Holdings
  % Of Portfolio % Change % Ownership
Apple (AAPL) 12.10% -44.02% 0.11%
General Motors (GM) 8.66% -14.57% 0.87%
Time Warner (TWX) 7.62% 68.83% 0.77%
Michael Kors (KORS) 6.57% 27.42% 4.50%
AerCap Holdings (AER) 5.81% 0.31% 3.73%
Macy’s (M) 4.31% New 2.14%
CONSOL Energy (CNX) 4.28% 0.00% 12.86%
Avangrid (AGR) 3.69% New
Green Brick Partners (GRBK) 3.18% 0.00% 49.41%
Mylan (MYL) 2.85% New 0.59%
Source: Greenlight Capital’s Q4 2015 13F

Einhorn’s long-term track record is too impressive to just write him off after one rough year. It’s exciting and encouraging to see him being proactive for 2016 — not waiting around for his beaten down stocks to turn, and instead making big changes to help ensure he doesn’t have a repeat of 2015. 

Risks To Consider: As hedge funds grow their assets under management it becomes harder to keep outperforming the market — as there are fewer stocks that can meaningfully move the fund’s performance. The worry is that Einhorn is too big to invest in stocks that can help him fully redeem himself. The other worry is that after a dismal 2015, Einhorn might be getting overly aggressive with his picks for 2016 — betting on risky stocks in hopes of big returns. 

Action To Take: Bet on Einhorn in 2016, but instead of buying a basket of stocks that embodies Einhorn’s entire portfolio, I think investors can simply pick the stocks that he’s most excited about, without being overly speculative. This includes Time Warner, Macy’s and Mylan. Shares of all three are down at least 20% over the past year and trading at less than 11 times next year’s earnings estimates. Two of the three offer dividends and all three have established business models — which will help mitigate the risk that Einhorn is getting too aggressive with his picks. 

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