Greenlight Capital’s Letter To Investors

October 7, 2008

Dealbreaker has posted four investor letters from prominent hedge funds, the letter from Greenlight Capital (pdf) grabbed my attention.

It contains lots of great investment ideas, following this post I will share what I think are the two best ideas mentioned.

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Portfolio

October 5, 2008

My forth investment is:

  • A full position (10% of my portfolio) in Winn Dixe at a share price of US$13.52.

Portfolio

September 17, 2008

My third investment is:

  • A full position (10% of my portfolio) in Echostar at a share price of US$28.77.

Activist Investors

September 16, 2008

Hedge Relations offers a free newsletter that identifies investments made by activist investors.


Brinks Spin Off

September 16, 2008

Margin of Safety has a post about the spin off of the home security business from Brinks.

Brinks Co. (NYSE: BCO) has been the recent recipient of much attention from the hedge fund activists including Pirate Capital and MMI Investments which have taken sizable positions in the company. Pirate’s founder eventually got his way and was given a seat on the Board. Since then this one seems to be flying under the radar a bit. Meanwhile, the folks at MMI have been kind enough to share their diligence with us. A bit of sleuthing on the SEC web site and you will come across a set of slides filed by MMI laying out various scenarios under which Brinks management would be able to increase shareholder value.

Slides from MMI.

The post was in April 2007, but the spin off is now scheduled to happen at the end of October.


Portfolio

September 4, 2008

As I have mentioned previously, I am going to use this blog to track investments that I make.

The first two investments I made on Tuesday are:

  • A full position (10% of my portfolio) in Sears at a share price of US$92.34.
  • A full position in American Express at US$40.63 a share.

I plan to post my investment thesis, along with what I believe each company’s intrinsic value is in the next week or so.


MSFT

July 21, 2008

Valuecruncher has valued MSFT at US$33 a share, compared to the current price of US$26 a share.

Valuecruncher points out that:

The Client (Windows), Server and Tools (enterprise solutions) and MBD (Office) divisions drive 83% of revenues and over 100% of operating profits (the On-line Services and Entertainment divisions are still operating at a loss).

The point reminded me of this speech (pdf) by David Einhorn of Greenlight Capital. Basically he says the market is undervaluing MSFT by not recognising the value of the core business (Windows, enterprise solutions and office), while punishing MSFT for the divisions that are losing money.

He argues that the core business deserves a higher multiple, while the money losing divisions will not burn cash indefinitely. And goes on to outline the other potential options embedded in the company, like Windows mobile. He also notes that MSFT need to take on some debt and return cash to shareholders. Of course the Yahoo transaction could interfere with this, but overall it seems pretty sensible.

Here are a few quotes from the speech (pdf):

If I strip out these unprofitable segments from the consolidated numbers, Microsoft trades at 9x EBIT and 13.5x P/E (on adjusted fiscal 2007 estimates). Chemical Companies, Farm Equipment Companies and Railroads trade at higher multiples than this at the top of their cycles. Even Supermarkets trade higher than this.

I am not a techie and I am not going to outline how Microsoft is going to compete and win in every area they have targeted…. But I do know that Microsoft has invested and is continuing to invest over $6 billion a year in these things. This investment penalizes operating earnings every quarter. I believe that the current value of Microsoft shares implies that these investments are value destroyers. With Microsoft’s history, I am willing to take the other side of that bet without a PhD.

If Microsoft took the part of its mission to work for shareholders seriously it would optimize its cost of capital. Instead of $35 billion of cash it should hold perhaps $40 billion of debt or 2 times EBIT. This sort of recapitalization would return one third of the market capitalization to shareholders through dividends or buybacks.

As of 31 March 2008, Greenlight Capital held a US$387m position in MSFT, the second biggest position in their fund behind TGT. If you do a search for Greenlight Capital under Institutional Holdings on NASDAQ.com you can see all the holdings in Greenlight’s US$2.6bn portfolio.