A Major Shakeup at a Major Hedge Fund

David Einhorn, manager of Greenlight Capital, released his fourth-quarter investor letter last week. The major hedge fund was down more than 20% in 2015.
However, Einhorn remains humble. In his letter, he notes that Greenlight lost money in every quarter. A big reason is because the fund was short two of the best-performing stocks in the S&P 500: Netflix (NASDAQ: NFLX) and Amazon.com (NASDAQ: AMZN).
Meanwhile, it was long two of the worst-performing stocks: Consol Energy (NYSE: CNX) and Micron Technology (NASDAQ: MU).
Einhorn notes that 2015 was a difficult year for value stocks. And remember that Einhorn is one of the best hedge fund managers around. Since its inception in 1996, Greenlight has generated a 16.5% annualized return.
Einhorn has already made some major shakeups to his portfolio in 2016. Here’s a look at the notable changes.

Major New Position

Einhorn announced a new position in Macy’s (NYSE: M) last week. Greenlight owns shares at an average cost of about $46. The stock has been cut in half over the last few months, given the weak retail environment and poor showing over the holiday shopping season. A big part of that, however, was due to the unseasonably warm weather.
Greenlight thinks Macy’s shares are too cheap to ignore and that its real estate is a key catalyst for the stock. This comes as a fellow hedge fund, Starboard Value, believes that shares are worth $125 because of the owned real estate. And at the least, shares could get to $70 rather quickly if Macy’s decides to transfer its key properties into a joint venture – as Starboard recommended earlier this year.
Then there’s another thesis proposed by Einhorn. He suggested that a private-equity firm could team up with a real estate investment trust to buy Macy’s. Then the group could unlock Macy’s real estate value in the private markets.
Einhorn notes, “Even if this doesn’t happen, the shares are cheap at 5x EBITDA, 7x equity free cash flow, and less than 9x 2015 EPS, with a healthy balance sheet and strong history of share repurchases.”

Another Notable Buy

Another key addition to the Greenlight portfolio is Mylan (NASDAQ: MYL), one of the pharmaceutical industry’s largest generic drug companies. The stock is flat over the last year.
It really was a perfect storm for Mylan in 2015. The abandoned takeover of Mylan by Teva Pharmaceuticals (NASDAQ: TEVA), the failed buyout of Perrigo (NYSE: PRGO), and corporate governance issues have all been negatives for the stock.
Einhorn pointed out that there’s also the unease over drug pricing that has investors unjustifiably spooked. He cited “widespread unease about the pharmaceutical sector amidst scrutiny of specialty pharmaceutical manufacturers like Valeant.”
But even with all of those factors there is medium-term upside for Mylan. The company has several tailwinds, including a competitor recall, an announced share repurchase, and board review of corporate governance complaints.

Greenlight Dumps Micron

Micron Technology had been one of Greenlight’s top holdings since 2013. The fund managed to invest in the stock when it was trading in the low teens and rode it all the way up to $35 a share. However, Greenlight didn’t take profits and ended up riding the stock all the way back down to the teens.
Micron was Greenlight’s biggest winner in 2014 and biggest loser in 2015. However, the hedge fund still finished with a 14% annualized rate of return after it sold all of its shares in the fourth quarter.
At 6 times earnings, Micron stock still looks ridiculously cheap. However, the big issue is that the company’s primary business – memory chips – is very commodity-like, making it a very cyclical stock. Competition is also on the rise, with Samsung getting more aggressive in the memory chip market.
We all have “off” years. It looks like 2015 was a big off year for Greenlight, but if history tells us anything, it’s that Einhorn could bounce back in a big way.

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