David Einhorn continues to rail at the logic of the stock market.
In his first-quarter client letter, signed by Greenlight Capital and obtained by Institutional Investor, the hedge fund manager asserts: “The stock market is fundamentally broken!” This is a theme Einhorn has been harping on since early 2021.
As he puts it in the firm’s latest missive: Most investment capital does not care about valuation, as evidenced by the large amount of money in passive index funds; cannot figure out valuation as retail investors have no formal valuation training; and chooses not to care about valuation, a reference to several market strategies that care more about price than value.
“The result is that a very small portion of trading volume today is based on strategies that try to identify which stocks are undervalued in order to buy them for an intermediate or a long-term investment period, with a view that the shares will outperform as they close the discount to fair value,” states the April 24 letter.
Greenlight stresses that massive passive index funds have become “price makers,” as their flows are an important driver of price. This reality won’t cause Einhorn to abandon the markets, though. Rather, he feels this phenomenon has created favorable circumstances for self-styled value investors like himself.
“This historic shifting of capital is a beautiful opportunity set in which we can invest,” the Greenlight letter says. “We are not complaining. In fact, we are excited.”
The letter notes that when undervalued stocks underperform for a long time, some of them “become ridiculously cheap.” So Greenlight expects that even if the stock market remains “broken,” the firm will do well and insists it is finding “compelling investments” with return profiles that “historically we have only seen at the bottom of a bear market!”
As II previously reported, Greenlight gained 4.9 percent in first-quarter 2024. The long portfolio was up 2.2 percent net and the single-name short portfolio broke even, per the letter.
Greenlight says it established several sizable new positions in the first quarter. The biggest was “new” Solvay, a Belgian chemicals company that was the top-five position Greenlight alluded to in its fourth-quarter letter and then discussed at the April 3 Sohn conference. It is the surviving company after the spin-out of Syensqo, a small position Greenlight discussed in an earlier letter.
Greenlight says Solvay’s key products are soda ash (sodium carbonate) and Bicar (sodium bicarbondate), peroxides, silicas, fluorine, and rare earth formulations and solvents. It says the shares are undervalued, noting that the company has a conservative balance sheet and a nearly 10 percent dividend yield.
Greenlight also established a medium-size position in Penn Entertainment, which operates regional casinos. The company provides online gaming, especially sports betting, to which Greenlight believes the market “ascribes a substantial negative value.”
The hedge fund noted that in 2020 Penn, then called Penn National Gaming, bought a minority stake in Barstool Sports and three years later purchased the rest. The acquisition “was a complete failure” and the company abandoned the investment.
In 2021, Penn shelled out $2 billion to acquire Score Media and Gaming to create a better online sports gaming business. And last year, it announced a deal with ESPN to create ESPN BET. Greenlight says the market right now gives zero value to ESPN BET thanks to the Barstool failure, noting investors have “serious doubts” about the company’s strategy and ability to execute it. Greenlight adds that if the market ascribed to Penn just 15 percent of the value of DraftKings, the business would be worth $20 per share. The firm paid $22.69 per share for its stake in Penn Entertainment.
Greenlight also established what it calls a small long position in Roivant Sciences, a biotech focused on therapies for autoimmune conditions, at an average of $10.96 per share. The hedge fund asserts that the market essentially views the company as “worthless” given that it has a $9 billion market cap but $6 billion in net cash and a roughly $2.6 billion stake in its publicly traded subsidiary, Immunovant.
The firm took a new small position in the Class A shares of Liberty Global, a telecommunications company with stakes in operations in Switzerland, the U.K., Belgium, the Netherlands, and Ireland. Greenlight paid an average $19.19 per share. It established “a medium-size macro position” as well to benefit from higher copper prices.
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