David Einhorn Gives The Greenlight To Spins- Uniper, Chemours, Consol Energy, Brighthouse

It’s that time of year again where thanks to sites like Market Folly we mere mortals get to enjoy the vast wisdom contained in hedge fund year end letters. David Einhorn’s Greenlight Capital is always a good one to read although this past year was a challenging one for the value investor. The fund returned <2% in 2017 vs. the S&P’s 21+% so this letter must have been a toughie to write. Even for LPs just interested in uncorrelated investments, it’s never fun seeing your high fee investment trounced tenfold by a Vanguard S&P 500 ETF.

Despite the tough year, some of the fund’s biggest winners in 2017 were spinoffs and it looks like Mr. Einhorn will continue looking to the space for alpha in 2018. Lets take a look at some of his spin holdings:

1. Uniper (UNPRF) – this was one of his biggest winners in 2017. The European fossil-fuel focused company was a 2016 spinoff from E.ON (EONGY) and was disliked by many. Some even called it the ‘ugliest spin-off’ they’d ever seen. Whoops. I haven’t followed this situation too closely, but of course the name more than doubled this past year due to ‘improved results and news of a potential takeover’. Greenblatt’s book pointed out this phenomenon, but it’s always striking to see a really ugly looking spin with seemingly no prospects end up a total winner. Speaking of…
2. Chemours (CC) – another big 2017 winner for the fund with the stock more than doubling over the course of the year (and even better over the past few years). We have been meaning to write about this name for some time, but the turnaround at Chemours is nothing short of incredible. The 2015 spinoff from DuPont was basically DOA and sure, shares initially tanked, but reports of its demise were apparently premature. The underlying market for its main products turned around nicely leading to strong earnings and it had some favorable outcomes on its legacy issues.
3. Consol Energy – a big winner in Q4, the company completed its spinoff in late 2017 transforming itself into a coal company, CONSOL Energy (CEIX) and a natural gas company, CNX Resources (CNX). Here is how the fund thinks about it: ‘Both companies have high quality resource positions, first quartile cost structures and strong management teams. We expect the spin will result in both companies having enhanced growth opportunities, reduced complexity and more natural analyst coverage and investor bases. CNX trades at less than 6x 2018EBITDA and CEIX trades at less than 5x 2018 EBITDA’
4. Brighthouse Financial (BHF) – a new position initiated by the company. The company is a 2017 spinoff from FSOC oversight freed MetLife (MET). The basic thesis is that the market is way too pessimistic about its future and it trades assuming a very conservative outlook. That means if things go well or even just ok then you have good upside. In Einhorn’s words, ‘the flow-through from favorable capital markets, possibly combined with better-than-forecasted execution typical of spin-offs of this type, should yield an ability to return capital much sooner than expected. With the shares trading at approximately a 40-50% discount to similar companies with normal capital return policies, there is plenty of upside to the shares as the market begins to discount normalization. Management is well incentivized if the shares appreciate.’

That is a lot of spinoffs! In other fund spinoff news, Greenlight exited its investment in HPE after the CEO, Meg Whitman, left the company.

A bit off topic, but one of the more surprising parts of the letter was the composition of his short book which were the fund’s biggest losers in 2017:

The biggest losers for the year were our short positions on the “bubble basket” and Caterpillar (CAT). It’s tough to look at full year losses on Amazon (+56%), athenahealth(+26%), Netflix (+55%) and Tesla (+46%) when we believe all those stocks appeared priced with little margin for error entering the year, and none executed well or met fundamental expectations in 2017.