Greenlight Capital Q2 Letter: New Positions in Applied Materials, Bank of New York Mellon

David Einhorn's hedge fund Greenlight Capital is out with its second quarter letter.  Greenlight returned (1.5)% in Q2 and year-to-date is (3.3)%.  Their average exposure was 103% long and 86% short, leaving them net long only 17%.  The letter details numerous recent portfolio moves:

New long positions: Applied Materials (AMAT), Bank of New York Mellon (BK), CNX Coal Resources (CNXC)

Sold long positions: Altice (AMS:ATC), Conn's (CONN), EMC (EMC), Marvell Technology (MRVL), Nokia (NOK), Playtech (LON:PTEC)

Covered shorts: Intuitive Surgical (ISRG), Vale (VALE)

Einhorn talks about all of the positions in the letter and also gives commentary on Micron (MU), one of his biggest positions that has sold-off recently.

At the end of Q2, Greenlight's largest positions in alphabetical order were: Apple (AAPL), CONSOL Energy (CNX), General Motors (GM), gold, Micron Technology (MU), and SunEdison (SUNE).

Embedded below is Greenlight's Q2 letter:

   Greenlight Q2 15

ValueWalk first posted the letter.

Jim Chanos: Short Vale & Petrobras (Sohn London Conference)

Continuing our series of notes from the Sohn London Investment Conference, next up is Jim Chanos of Kynikos Associates who gave a presentation entitled 'Brazil: Resource Rich, Not Riches."


Negative on Brazil

For those unaware, Chanos runs short-biased hedge fund Kynikos Associates.  As such, it should come as no surprise that at the event he presented 2 short ideas both with ties to Brazil: a metals and mining company, as well as an integrated oil and gas company.

The general theme of Chanos’s argument went beyond these two short ideas, though, as he suggested that Brazil was generally an unfriendly place for investors in a similar way to his recent portrayal of China as a roach motel.

He said that like China, Brazil has a system of state capitalism  which leads investors to subsidize state aims at the expense of investment returns. In Chanos’ view, both China and Brazil operate the wrong form of capitalism which leads capitalists to ‘get the bad end of the stick’.


Short Vale (VALE)

He said that the company appears cheap to value investors but in his view it is a value trap.  His main thesis on this name was that iron ore itself is over-valued.  Readers will recall that Greenlight Capital's David Einhorn said to short iron ore recently at the Great Investors' Best Ideas event.

Chanos argued that Vale is too dependent on China’s demand for iron ore.  Demand might be about to fall and besides China is building more of its own iron ore plants.  There are very few barriers to entry.


Short Petrobras (PBR)

This isn't the first time that Chanos has been negative on the Brazil state owned oil company as we've posted up his past negative commentary on PBR.

The Kynikos founder also feels Petrobras is a value trap and he also highlighted that:

- It looks like a value story trading on EV/EBITDA 2013 5.3x but it's not
- It has massive reserves of oil
- The government owns 64% of Petrobras so they cannot charge the full market price for oil and gas because of government interference
- They have a poor record of exploiting reserves

We've also posted up some of Kynikos' other short positions that have been revealed.


For the rest of the hedge fund presentations from this event, head to notes from Sohn London Investment Conference.

David Einhorn: Short Iron Ore (Great Investors Best Ideas Conference)

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is David Einhorn of Greenlight Capital.  Einhorn made a presentation entitled 'If you give a miner a dollar..." and said to short dirt.  And by dirt, what he means is to short iron ore.

While Einhorn said that everyone "should have gold miners in their portfolio," it became clear he was less sanguine about other types of miners.


Iron Ore Supply/Demand

Einhorn started his presentation with the supply/demand dynamics of iron ore, noting that the infrastructure to get ore out of the ground is not cheap.  He pointed out that it's cheaper for China to import ore from Australia than to dig it out of their own ground.  Einhorn put up a chart showing iron ore prices from 1981-2011, peaking in the most recent year.

He went on to say that, if you give miners dollars, they dig holes.  Higher prices attracted new supply and new players.  It takes years to bring new supply online and he points out that there's a massive amount of supply about to hit the market.

He points out the Chinese investment binge as the driver of demand and notes that "something that's unsustainable persists... until it doesn't."

Einhorn then shifted to steel and noted that 2010 was the last year where steel saw double-digit demand growth.  Supply now exceeds demand and they're in the midst of expansion.  Big projects from 2010/2011 are coming online and the cost of stopping development is too high.
 
Einhorn argues that you can't contain the near-term situation since it's so expensive to halt projects.  He feels that ore prices will head below 100/ton and could get as low as 80/ton.  He even said that by 2014 it could go as low as the 60's.  He opined that the iron ore situation could soon reflect the same situations that took place in polysilicon and LEDs.


Losers Singled Out By Einhorn

While Einhorn did not explicitly come out and say he was short any of these names, he put up a list of companies that will lose in this scenario:

Iron Ore Miners (huge projects that will come online into declining markets): Vale (VALE), BHP Billiton (BHP), Rio Tinto (RIO), Fortescue (FMG), Cliffs (CLF)

Equipment Makers (already have seen growth into infrastructure build): Caterpillar (CAT), Joy Global (JOY)

Integrated Steel Companies: US Steel (X), Arcelor Mittal (MT).


Einhorn pointed out that X and MT have had an advantage because they own their ore supplies while their competition purchases ore in the markets.  However, he says this competitive advantage erodes as the price of ore falls.  The price of steel is also falling.  These integrated steel companies are also facing competition from irrational Chinese steel mills that are willing to operate at a loss.

Last week we also highlighted that Tiger Management's Julian Robertson said to avoid steel stocks as well.

Einhorn argues that the equities of the above companies reflect resumption of Chinese demand but that seems dubious.  He feels like companies are investing a lot at the top.  For more from this hedgie, also check out Einhorn's presentation on 3 ideas from the Value Investing Congress.


For the rest of the GIBI presentations, head to notes from the Great Investors' Best Ideas conference.

Jim Chanos: Beware the Global Value-Trap (Presentation From Value Investing Congress)

At the Value Investing Congress today, Jim Chanos of hedge fund Kynikos Associates talked about various companies to short in a presentation entitled "Beware the Global Value-Trap!"

Be sure to check out all of our notes from the Value Investing Congress.


Jim Chanos (Kynikos Associates): Short Exxon Mobil (XOM), GameStop (GME) & ITT Educational (ESI)

Embedded below is his full slideshow presentation:



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Chanos' entire presentation focused on “how value investors can avoid value traps.” He went from basics things to watch for, to his current specific short themes.


Value Stock Traits: Predictable, consistent cash flows, defensible business, don’t need superior management, low/reasonable valuation, margin of safety, reliable transparent financial statements, “analyzable.”


Classic Short Selling Themes

1. Booms that go bust, debt-driven asset inflation; real estate in US, telecom overbuild, far east real estate now. Cyclical: Sometimes cycles become secular. Autos, airlines. Overly dependent on one product. Coleco, renewable energy. Illegal does not equal value. Be careful- they often look deceptively cheap. Online Poker.

2. Consumer fads

3. Technological obsolescence: Probably killed more value investors in last 20 years than any other. Examples: Minicomputers, Eastman Kodak, Video Rental. The cash flows drop off faster than you think they do. At some point, cash flows hit a tipping point, and drop precipitously.

4. Structurally flawed accounting: Free cash flow/Run by accountants. Tyco example. Be “Triply careful” whenever management pulls out some metric that they define- such as cash flow. Be careful when they keep pointing to a metric they like. Accounting issues. Confusing disclosure. BFT. Nonsensical GAAP. Sub prime lenders example.

5. Selling $1.00 for $2.00

6. Rapid Prior Growth: “Law of large numbers” Telecom build out example. When tech shift occurs, old metrics that value investors use are totally irrelevant.

7. Value Traps



Other Traits of Value Traps

Marquis management. New CEO as a savior- it is often the business that exits with its reputation intact. Conseco example. Keep doing your work. Look at their incentive- often they win no matter what.

Famous investors: In every great stock market disaster or fraud, there is always one or two great investors invested in the thing all the way down. Enron, dot-com, banks, always "smart guys" involved all the way down. Don’t let your work stop because a smart guy is in the stock. It always happens, even the best make mistakes.

Appears cheap only using management’s metric. EBITDA example. Almost every major business needs depreciation, capital deprecation, if you don’t consider this, you are cheating yourself. Cable TV example. Stocks have done nothing for years because they always quote EBITDA only, in a capital-intensive business.

Ignore restructuring charges at your own peril. Eastman Kodak. Those charges were actual charges, and they never fixed the revenue line. Yet investors used management metrics and ignored the real situation.

Growth by acquisition. Tyco, roll-ups. Be very careful. Earlier today David Einhorn said to short Green Mountain Coffee Roasters (GMCR) and pointed out that the company has largely grown through acquisition.

Buying low growth low P/E businesses with expensive high P/E stock should be a huge red flag. Be careful when you see big write-downs because management is claiming to be conservative, they are banking some earnings. Rely on a “supranational put”- government will bail me out.



Current Value Traps

Liquidating Trusts: Integrated oil companies. Cost structure grown dramatically; finding and development up from $5/bbl to $22/bbl. Production $5/bbl to $15/bbl. Cost of marginal barrel of oil is up and rising, $37 all-in now, where oil bottomed out in 2008/9. Gas has opposite problem. Monster acquisition in gas area. Exxon Mobil (XOM): FCF dropping off, not even enough to cover its cash needs. Also applies to other national oil companies, look even worse.

Digital Distribution Destruction: video games. Will follow music and movies, to digital distribution. Gamestop (GME): Looks cheap, has lots of stores, in a terrible business. Will appear cheap all the way down. As bandwidth and wireless speed increases, the value of their brick and mortar will collapse, just as it has with movies and music. Also other video rental. (Coinstar (CSTR) perhaps? Didn’t say the name.)

"Mis-education" For-Profit Colleges: Now they look cheap as value investors pile into them, says gainful employment didn’t have teeth. “Can’t think of a more predatory business in the US right now.” Congressional support is waning. 90% of the loans are federal loans, and default rates are skyrocketing, was 20% in 2009, now heading toward 30%. Serious line item in the federal budget now. ITT Educational (ESI): Have an off-balance sheet entity. Cohort default rate 22.4% and rising, one of the most expensive tuition of the colleges. Bulls say Republicans will give them cover, but now Republicans have started to walk away- General Petraues' daughter has been investigating the abuse of soldiers.

Nationalistic Commodity: Be careful- they are down a lot and appear cheap, especially Iron Ore, down from $200 to $150-160. Problem is it was $30 forever. Commodities look cheap, but not if you look at longer-term charts. Leveraged to Chinese growth. Vale (VALE): Looks cheap, but in Brazil, which isn’t your friend as a shareholder. VALE is building its own Navy, which they don’t expect to have a positive rate of return.

China Bubble: Chinese State Banks. Underground lending is a significant risk. CDSs went from 30 bp to 200 bp in the summer. PRC sovereign fund said they would be buying stock in these banks. They are instruments of state policy; they are not there to maximize shareholder wealth. They are cheap, but there are many lurking time bombs. They were recapitalized twice in last 12 years even during strong economy in PRC. The refrain in China is “yes there is a lot of silly stuff going on, but the government won’t let anything happen.” Agricultural Bank of China (HKEX.1288): Cheap, but half the capital is bogus. Chinese banks are very levered. PRC this year will expand credit outstanding by 35% of GDP; it was 25-30% each year for 4 years, 100% of GDP. “The only westerners in history that ever got a dollar out of China were the Opium dealers, and they had the British Royal Navy behind them.”



Q&A Session:

1. Commodity boom not supported by China, what about India? Chanos says India is self-sufficient in Iron Ore, and China demand is 50-80% of many of the commodities.

2. China: real estate sales volume was down 40-50% in golden month. Prices haven't fallen, but transactions always dry up first. High-speed rail crash was a psychological hit- even if only 5% of GDP, it was a source of pride for China. Corners being cut, this crash highlighted to the public that there was a cost to the “growth at all costs” mentality in China.

3. When asked about Japanese bonds, Chanos added some humor to his talk by saying, "we only want to piss off one Asian country at a time."



About Jim Chanos: He manages the short-selling focused hedge fund Kynikos Associates. We've covered how Chanos thinks China is a bubble and that he is also targeting alternative energy, shorting Vestas and First Solar.

You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.