Every quarter, we endure the deluge of earnings reports and pundit chatter. It's the frustrating reality of the 24-hour news cycle and hyperactive trading tendencies. While a quarterly report may be unnecessary in the long run and contribute to market hysteria, there is a silver lining to the system. Along with company earnings, we get to hear from fund managers who have to report to their limited partners and let them know what's up. Any chance I can get to glean any potential insight from a respected fund manager, I'll take. Notorious short-seller David Einhorn and his Greenlight Capital fund recently sent out a quarterly letter, and it quickly made it ways onto the Web. Here are a few important takeaways from one of the world's best investors.
Update on Green Mountain
One of David Einhorn's more well-known (and accurate) shorts is Green Mountain Coffee Roasters (NASDAQ: GMCR). At the 2011 Value Investing Congress, the hedge fund manager alleged several accounting issues taking place at the company, as well as serious headwinds going forward with the pending expiration of K-Cup patents and increasing competition from shops such as Starbucks (NASDAQ: SBUX). The presentation was enough to send the stock cascading down, and it has yet to make a substantial recovery.
Well, at this year's VIC and in the quarterly letter, we got an update of Greenlight's position on Green Mountain, and it's still very negative:
- Greenlight does not believe the company conducted a substantial investigation into the accounting allegations.
- GMCR's K-Cup patents have expired, leaving the business wide open and allowing lower-cost competitors to come streaming in. This is predicted to create a manufacturing commodity scenario that will destroy Green Mountain's already low margins.
- There are nine competitors readying to launch their own K-Cup products.
- Starbucks has launched the Verismo single-serve system, which has been downplayed by Green Mountain management but in reality poses a serious threat.
Green Mountain has bounced back off its $17 per share lows, but it's still a no-man's-land for investors. If you are attracted to bargain-priced stocks, I suggest you look elsewhere.
Long GM
Also presented at the Value Investing Congress was the fund's position in General Motors (NYSE: GM). Einhorn argues that the company is still undervalued at eight times 2012 earnings given its improved position both competitively and financially. The company is in the midst of a substantial product upgrade cycle, which will no doubt improve sales. A pending restructuring of its European business and the sale of U.S. government-held shares next year will also provide opportunities for the carmaker to further leverage its enhanced condition. Greenlight believes the company has the ability to earn $8 in untaxed cash per share in 2014. That's compared to around $5.20 in cash per share for 2011.
The one you've already heard about
Einhorn's biggest news lately has been the fund's new short position in Chipotle Mexican Grill (NYSE: CMG). The thesis has been widely disseminated by now, but there are a few interesting details worth sharing from the letter.
Greenlight conducted what appears to be a pretty substantial consumer survey. The fund surveyed 1,608 customers, dividing them into different demographic groups. Twenty-five percent of those interviewed never go to Taco Bell, and make on average around $60,000 a year in income. Out of the other 75%, around one-third of them tried the new Taco Bell Cantina Bell menu within its first 50 days. Out of that third, half of them preferred Chipotle. The other half were a mixture of those who preferred Taco Bell's items or considered the two products to be about equal.
Those are some pretty troubling figures for a restaurant that still trades at substantial premiums to its peers and faces other headwinds going forward, including increased health care expenses and higher food costs across the board.
Have some faith
You may not agree with all of the fund's investment theses, and no one bats 1,000 in the investing world, but the fund's third-quarter performance should demonstrate that its management knows a thing or two: The fund returned 9.4% net of fees for the quarter, easily outstripping the progress of the S&P. For the year, Greenlight is up a little more than 13% net.
A little bit of free insight from the world's greats can go a long way. While most professional money managers struggle to beat indexes, a few of them consistently outperform, and those deserve your attention.
