Greenlight Capital Q1 2017 Letter
The Greenlight Capital funds (the “Partnerships”) returned 1.3%, net of fees and expenses, in the first quarter of 2017. During the quarter, the S&P 500 index returned 6.1%. From a portfolio perspective, this quarter was a quiet one. Our longs were profitable, though they went up a bit less than the market. Our shorts generated losses but added alpha, and gold gave us a small profit in macro. Apple (AAPL), Chemours (CC) and gold were the biggest winners; the bubble basket, Rite Aid (RAD), and a short position in Tesla (TSLA) were the biggest losers.
The detailed letter is available for download here
2
Grand Central Tower
140 East 45
th
Street, 24
th
Floor
New York, NY 10017
Phone: 212-973-1900
Fax 212-973-9219
www.greenlightcapital.com
April 25, 2017
Dear Partner:
The Greenlight Capital funds (the “Partnerships”) returned 1.3%,
1
net of fees and
expenses, in the first quarter of 2017. Du
ring the quarter, the S&P 500 index returned
6.1%.
From a portfolio perspective, this quarter
was a quiet one. Our longs were profitable,
though they went up a bit less than the mark
et. Our shorts generated losses but added
alpha, and gold gave us a small profit in
macro. Apple (AAPL), Chemours (CC) and gold
were the biggest winners; the bubble basket, Ri
te Aid (RAD), and a short position in Tesla
(TSLA) were the biggest losers.
AAPL advanced from $115.82 to $143.66 as it repor
ted a good quarter and the market is
now realizing it is not the next Nokia or
BlackBerry. AAPL’s market position is durable
and its ecosystem is expanding with high-margin
recurring services revenue streams. We
continue to like AAPL because we think it is
a superior company that still trades for less
than a market multiple.
CC settled its major litigation relating to the impact of PFOA, a discontinued toxic
chemical used to make Teflon. The bear cas
e arguing that the dama
ges would bankrupt the
company proved wrong, and the final figure wa
s within our range of expectations.
Meanwhile, the core titanium dioxide
business continues to benefit from a tight market and
rising prices. During the quarter
, CC advanced from $22.09 to $38.50.
Gold rose over 8% to start the year. Nothi
ng significant happened here (the White House
columns are not gold yet); gold simply reversed a portion of the post-election decline it
suffered last quarter. Gold remains a long-term
position with a thesis th
at global fiscal and
monetary policies rema
in very risky.
RAD fell from $8.24 to $4.25. We had expected
that Walgreens and RAD would satisfy
regulatory concerns and close the merger at $9
per share. Instead, the deal was re-cut to
between $6.50 and $7.00, and even at this date,
the regulatory concerns are not resolved.
We are watching the situation car
efully and we have trimmed th
e position, as our original
thinking was incorrect.
It was a difficult quarter to be short the bubbl
e basket, and TSLA in particular. Perhaps as
the prospects for tax reform
have dimmed, the market has regained enthusiasm for
profitless companies that aren’t at risk of payi
ng taxes. A number of these stocks are back
in full-blown momentum mode. Analysts cont
inue to raise “target prices” which the
1
Source: Greenlight Capital. Please refer to information contained in the disclosures at the end of the letter.
GREENLIGHT
®
market treats as news. The bulls explain th
at traditional valuation metrics no longer apply
to certain stocks. The longs
are confident that everyone el
se who holds these stocks
understands the dynamic and won’t sell either. W
ith holders reluctant to sell, the stocks
can only go up – seemingly to infinity and beyond.
We have seen this before. It’s painful
for the shorts, as the TSLA CEO has been
happy to remind everyone via Twitter. There
was no catalyst that we know of that burst the dot-com bubble in March 2000, and we
don’t have a particular catalyst in mind here. That said, the top will be the top, and it’s hard
to predict when it will happen. Notably, a nu
mber of bubble stocks advanced despite
missed expectations and/or falling estimates. Th
e basket is sized appropriately with the
understanding that twice a silly
price isn’t twice as silly. In due time, we expect these
bubbles to pop.
We added three small long positions:
Xerox spun out its business process outsourci
ng segment as Conduent (CNDT) at the end
of 2016. CNDT provides transaction and b
ack-office processing for a variety of
government and commercial clients. We belie
ve CNDT is burdened with underearning
contracts it can renegotiate or exit. Some busin
ess units that have been run as loss leaders
can evolve to be profit centers, and manageme
nt is in the process of running off other
unprofitable business units. Management has also
initiated a $700 million cost savings plan
to further improve margins. Despite the cu
rrent revenue headwinds
as the business is
restructured, management has committed to
growing revenue by the end of 2018 and
beyond, and they are incentivized to improve
earnings. We purchased CNDT at an average
entry price of $14.76 per share, which repres
ents 11x our conservati
ve case estimate for
2019 earnings. The stock ended the quarter at $16.78.
Perrigo (PRGO) is the largest manufacturer
of private label over-the-counter (OTC)
pharm
aceutical products for U.S. retailers and
pharmacy chains. Over the past decade the
company acquired other business lines, includ
ing a portfolio of European OTC brands
(Omega), a generics pharmaceutical business, and a royalty stream on a large multiple
sclerosis drug that has since
been divested. In November
2015, shareholders rejected a
hostile takeover offer from Mylan worth $175 pe
r share after the then-CEO laid out
ambitious standalone earnings targets. Unfortuna
tely for shareholders, these targets proved
far too optimistic and the CEO ultimately depa
rted. After several la
rge guidance cuts, we
believe the new management team has now set achievable earnings forecasts. Omega’s
business suffered from large restructuring expenses last year that s
hould not recur and has
additional margin upside as it streamlines its
product portfolio. The company also has a
dominant market position in its core U.S.
OTC business and shoul
d continue to grow
profits in this segment. We believe the
U.S. OTC business and Omega have profit and
growth characteristics similar to consumer products businesses, wh
ich trade at healthy
multiples due to the stability of their cash fl
ows. We purchased PRGO at an average price
of $68.81 per share or 11x our estimate of 2019 earnings. PRGO shares
ended the quarter
at $66.39.
The third new long position is a European fina
ncial institution that we cannot discuss at
this time, as per our policy regarding
the new European market regulations.
GREENLIGHT
®
While it was quiet on the portfol
io front, we made m
ore noise
than usual (and more than
we’d like) by making public our idea for Gene
ral Motors Company (GM) to unlock tens of
billions of dollars of share
holder value. As a general matte
r, we prefer to avoid public
activism. The last time we did
this was with AAPL in 2013 afte
r owning the stock for three
years. This is a similar situation; we had ow
ned GM shares for years before advancing our
idea to management.
When we offer companies private advice, they e
ither take it, or they
explain why they are
not going to take it. Usually if they reject the idea, we understand the reasoning and prefer
not to press the issue. Sometimes, we agree to
disagree, and then decide whether to hold
the stock or exit the position.
In the case of GM, we felt the need to press the
issue as we believe there is a lot of value to
unlock and the company did not fairly evaluate
our idea. Management made a decision and
then spent a great deal of effort coming up w
ith reasons to justify that decision. To poison
our idea, management went so far as to mi
srepresent our proposal to the credit rating
agencies, allowing them to claim that the co
mpany’s credit standing w
ould be in jeopardy
if it implemented our idea. Ironically, our id
ea was designed to be credit positive and the
least invasive way to unlock billions of dollars
of shareholder value. This sort of behavior
by management leaves us no room to agree to disagree.
We know this is a tough fight.
Fortunately, the math is on our
side (if GM does what we
suggest, we believe the stock will go up a lot) and the ultimate decision will be made by
our fellow shareholders. We believe others r
ecognize that the stock
is deeply undervalued
and when shareholders grasp the math and th
e extent of GM’s behavior, they will vote
with their wallets and for needed change at the Board level.
We exited several material pos
itions during the quarter:
We closed three Canadian bank shorts at a lo
ss as the oil and gas credit loss thesis didn’t
sufficiently materialize.
We closed our LyondellBasell Industries short at
a loss. Our thesis was that large capacity
additions, along with a potentially limited suppl
y of raw materials, would squeeze margins.
However, new industry capacity has taken
longer than expected to come on line.
We closed our RPC, Inc. short at a small loss, as favorable industry pricing tailwinds have
offset our company-specific concerns.
We closed our short in Signet Jewelers at a ga
in when negative comparable store sales and
class-action litigation caused the stock to fall.
It’s been a couple years since we’ve had an
investment team departure. In February,
Andrew Rechtschaffen left to start his own firm
, and Jaime Lester left to join a new hedge
fund. We thank them both for their contributi
ons and wish them well in their future
GREENLIGHT
®
endeavors. Operations is now a 2-to-1 favorite for the annual Ops vs. Investment team
basketball game, and we are recruiting analys
ts with above-average three-point shooting
skills. Also, we are pleased to report that
Emily Proctor was promoted to Operations
Analyst. Congratulations Emily!
At quarter-end, the larg
est disclosed long positions in the Partnerships were AerCap,
Bayer, CONSOL Energy, General Motors Co
mpany and gold. The Partnerships had an
average exposure of 108% long and 80% short.
“A great deal of intel
ligence can be invested in
ignorance when the need for illusion is deep.”
—
Saul Bellow
Best Regards,
Greenlight Capital, Inc.
GREENLIGHT
®
The i
nformation contained herein refl
ects the opinions and projections of
Greenlight Capital, Inc. and its
affiliates (collectively “Greenlight”) as
of the date of publication, which
are subject to change without notice
at any time subsequent to the date of issue. Greenlight does not represent that any opinion or projection will
be realized. All information provided is for informational purposes only and should not be deemed as
investment advice or a recommendation to purchase or sell any specific security. Greenlight has an economic
interest in the price movement of the securities discussed in this presentation, but Greenlight’s economic
interest is subject to change without notice. While the
information presented herein is believed to be reliable,
no representation or warranty is made concerning the accuracy of any data presented.
GREENLIGHT® and GREENLIGHT CAPITAL, INC. with
the star logo are regi
stered trademarks of
Greenlight Capital, Inc. or affiliated companies in
the United States, European Union and other countries
worldwide. All other trade names, trademarks, and serv
ice marks herein are the property of their respective
owners who retain all proprietary rights over their use. This communication is confidential and may not be
reproduced without prior written permission from Greenlight.
Unless otherwise noted, performance returns reflect the dollar-weighted average total returns, net of fees and
expenses, for an IPO eligible partner for Greenlight
Capital, L.P., Greenlight Capital Qualified, L.P.,
Greenlight Capital Offshore,
Ltd., Greenlight Capital Offshore Qualified, Ltd., and the dollar interest returns
of Greenlight Capital (Gold), L.P. and Greenlight
Capital Offshore (Gold), Ltd. (collectively, the
“Partnerships”). Each Partnership’s returns are net of the modified high-water mark incentive allocation of
10%.
Performance returns are estimated pend
ing the year-end audit. Past performance is not indicative of future
results. Actual returns may differ from the returns presented. Each partne
r will receive individual statements
showing returns from the Partnerships’ administrator. Reference to an index does not imply that the funds
will achieve returns, volatility or other results similar to the index. The total returns for the index do not
reflect the deduction of any fees or expenses which would reduce returns.
All exposure information is calculated on a delta adju
sted basis and excludes credit default swaps, interest
rate swaps, sovereign debt, currencies, commodities, vol
atility indexes and baskets, and derivatives on any of
these instruments. Weightings, exposure, attributio
n and performance contribution information reflects
estimates of the weighted average of such figures for investments by Greenlight Capital, L.P., Greenlight
Capital Qualified, L.P., Greenlight Capital Offshore, Ltd., Greenlight Capital Offshore Qualified, Ltd.,
Greenlight Capital (Gold), L.P., and Greenlight Capital Offshore (Gold), Ltd. (excluding the gold backing
held by the gold interests) and are the result of classifications and assumptions made in the sole judgment of
Greenlight.
Positions reflected in this letter do not represent a
ll the positions held, purchased, or sold, and in the
aggregate, the information may repr
esent a small percentage of activ
ity. The information presented is
intended to provide insight into the noteworthy events
, in the sole opinion of Greenlight, affecting the
Partnerships.
THIS SHALL NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO
BUY ANY INTERESTS IN ANY FUND MANAGED BY GREENLIGHT OR ANY OF ITS
AFFILIATES. SUCH AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY INTERESTS
MAY ONLY BE MADE PURSUANT TO DEFINITIVE SUBSCRIPTION DOCUMENTS BETWEEN A
FUND AND AN INVESTOR.
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