In his latest Shareholder Letter, David Einhorn discusses the frustration associated with owning two of the companies in his portfolio, GRBK and BHF, that have performed above expectations, but their share price it falling. Here’s an excerpt from the letter (H/T ValueWalk):
What we (and we assume you) find frustrating is our inability to achieve satisfactory investment results. We believe we were correct in our top-down view, long-short positioning and individual company performance and we still had a down quarter. This one-stepforward-two-steps-back result is…well, pick your own adjective.
As noted above, we had a positive quarter in short selling and in macro. The problem this time was in the long portfolio. It is easier to explain when we can highlight an analysis that we missed, developments that went against us, or just a difficult macro environment.
However, none of that was evident last quarter. We simply lost money in the face of what we thought was excellent performance by our companies. In fact, many of our longs not only exceeded consensus expectations, they exceeded our internal (even more optimistic) expectations.
Let’s start with Green Brick Partners (GRBK). The shares declined 9.8% this quarter from $22.74 to $20.52. In the June quarter, GRBK earned $1.02 per share (up 54% from the prior year and up 260% from 2019), easily exceeding analyst estimates of $0.85 per share. 2021 full-year consensus estimates rose from $3.34 to $3.68 per share and 2022 estimates rose from $3.80 per share to $4.06.
In August, the company held an analyst day where it highlighted that revenues and pretax income have grown 28% and 44% per year compounded since its 2014 IPO. Recent growth has been even faster. The company now generates a 30% ROE. GRBK highlighted that it has a very favorable land and market position that positions it for continued success. Nonetheless, the P/E on 2021 earnings shrank from an undemanding 6.8x to a very hard to explain 5.6x.
Yes, we have heard a bear thesis on housing that amounts to claims that overbuilding combined with higher prices will drive future buyers away. From what we can see, there is no sign of this. Demand remains very strong, and with rents rising quickly, owning is becoming a more attractive option.
The real problem is supply chain shortages, which are extending industry build times and making it hard to complete houses. To the extent that this pushes closings out, it merely derisks the forward year estimates and indicates that current results are likely far from peak and therefore deserve more respect from the market.
A couple weeks ago we sent you a link to an interview that David gave on Real Vision. In it he said:
Companies can report stupendous news and have very, very minimal share price reaction to it. It’s not that the stocks are hated; there’s nobody actually listening. There’s nobody on the call, there’s nobody performing analysis, there’s nobody recommending the stock. There’s nobody there to buy the stock.
You can read the entire letter here:
David Einhorn: Q3 2021 Shareholder Letter
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