David Einhorn’s value investing wins were highlighted in his latest October letter to investors. Fortuna, the goddess of fortune, is finally smiling on David Einhorn’s Greenlight Capital as the great rotation from momentum to value stocks played out in September.

The value-focused hedge fund posted an 8.4 percent return in September across its funds, according to a person familiar with the firm.

“Greenlight Capital hedge fund posted an 8.4 percent return in September across its funds

 

David Einhorn’s Greenlight, a year to date was nursing widening losses and battling redemption requests at a time when investors were embracing momentum stocks and were leaving value stocks neglected and waiting for a bid.

But a year in the financial markets is a long time and its David Einhorn’s value investing wins streek which has propelled Greenlight fund year-to-date performance to 24 percent.

Value investing is an investment strategy that entails picking stocks that investors have oversold due to their excessive pessimism. Value investors, the likes of David Einhorn’s Greenlight actively seek stocks which they believe the stock market has underestimated. 

On the other hand, momentum investing involves a strategy that seeks to profit from an existing trend, in other words, investor optimism.

Which stocks have contributed to David Einhorn’s value investing wins in the last quarter?

 

Greenlight has large positions in US carmaker General Motors and aircraft leasing company AerCap

 

Greenlight has large positions in US carmaker General Motors and aircraft leasing company AerCap. These so so-called value stocks fell out of favor with investors in pursuit of more growth-oriented companies.

David Einhorn’s value investing wins were also bolstered by betting against momentum stocks, such as Netflix.

David Einhorn’s Greenlight wrote in its October investor’s letter that the fund made money last quarter by betting against Netflix Inc. 

Netflix is facing stiff competition from new competitors and has “yet to demonstrate a profitable business model,” wrote David Einhorn’s Greenlight.

“For a long time subscribers and sales have increased, but cash costs have grown even faster,” he wrote. “This year the company projects to burn a stunning $3.5 billion on just $20 billion of revenue” added David Einhorn.  

Tesla’s business financials reflect a decade of annual losses and an accumulated deficit of over $6 billion, despite billions of dollars of taxpayer subsidies” – David Einhorn

David Einhorn’s Greenlight questions Netflix’s business model

“Netflix created a niche by licensing cheap content and growing its subscriber base with a low-priced, value offering that aggregated hundreds of popular titles owned by major studios” David Einhorn said. “That arbitrage has gone away as the cost of licensed content has soared, competition has intensified and traditional studios are pulling their libraries” he added

In short, Netflix was not on the stock buy list of David Einhorn’s value investing wins. 

Netflix will struggle to replace the shows it’s losing to other streaming networks, including “Friends” and “The Office” wrote David Einhorn. “Netflix “does not appear to have created any similar franchises to rival the longevity of the shows it is losing, as viewership tends to collapse soon after introduction. When was the last time you heard anyone mention watching ‘House of Cards’?” added David Einhorn. 

So David Einhorn’s Greenlight placed puts on Netflix

A put is a contract which gives Greenlight the right to sell Netflix stock, at a specified price (the strike), by a predetermined date. The risk is that Netflix’s stock price rallies making those puts worth on expiry. But fortunately for David Einhorn’s Greenlight, Netflix stock is down a significant 27% in the third quarter after gaining the previous two periods. It is unclear just how profitable David Einhorn’s bearish wages on Netflix has been, bearing in mind that David Einhorn has held positions against the company since at least 2016, and its stock has gone up the past four years. 

Tesla, the Electric car maker was also noticeably absent from David Einhorn’s value investing wins

“As for our short of Tesla, it has fluctuated. In a multi-year bull market, it hasn’t performed badly. By continually changing the narrative and narrowly averting crisis after crisis, you certainly have kept it interesting,” wrote David Einhorn in a letter to Tesla’s Musk. “We shall see what happens from here,” added David Einhorn. 

“Tesla’s business financials reflect a decade of annual losses and an accumulated deficit of over $6 billion, despite billions of dollars of taxpayer subsidies” wrote David Einhorn.

Deception is about to catch up with them” – David Einhorn (on Tesla)

In 2018 David Einhorn compared Tesla to the bankrupt Lehman Brothers

“Deception is about to catch up with them” wrote David Einhorn. Lehman threatened short sellers, refused to raise capital (it even bought back stock) and management publicly suggested it would go private. Shareholders, creditors, employees, and the global economy paid a big price when management’s reckless behavior led to bankruptcy” he wrote back in late 2018.

Tesla tinkering on a bankrupcy was a viewed shared by several prominent investors. 

The credit default swap market was showing an 18% chance that Tesla would go bankrupt in two years. Tesla’s suppliers were owed 3 billion dollars in accounts. 

Most recently Tesla Inc. chief executive officer Elon Musk said he shifted resources from the solar company he bought three years ago to save his electric-car company from bankruptcy while it was ramping up production of the Model 3. 

Surprisingly Telsa stocks are near an all-year high in the wake of Brazil’s largest independent hedge-fund managers, Adam Capital, scrapped its short position on Tesla

According to Bloomberg, the fund wrote: “in a monthly note to clients that the company’s improving operating efficiency has hurt its investment thesis.” Tesla’s surprise profit in the third quarter with Tesla’s EPS coming in at $1.86, which was significantly better than analysts’ estimate of -$0.23 help to boost the stock. 

Perhaps David Einhorn’s Greenlight will through the towel in on his Tesla short position. 

Meanwhile, the other of David Einhorn’s value investing wins include Green Brick Partners (GRBK), AerCap Holdings (AER), Brighthouse Financial (BHF), and CONSOL Coal Resources LP (CCR). These stocks represent 16.65%, 14.78%, 13.36%, 8.91%, and 6.75%, respectively, holdings in the hedge fund’s portfolio.   

David Einhorn’s Greenlight also announced that it has reduced its stake in General Motors in an orderly way. Nevertheless, the stock continues to be the firm’s top holding for the last five years.