David Einhorn’s Q2 2023 letter to Greenlight Capital investors, discussing his long positions in NET Power Inc (NYSE:NPWR) and Onex Corp (TSE:ONEX). Full letter here.
Dear Partner:
The Greenlight Capital funds (the “Partnerships”) returned 14.5%1 in the second quarter of 2023, net of fees and expenses, compared to an 8.7% return for the S&P 500 index.
If you would have told us on January 1 that for the first half of the year, the S&P 500 would be up 17%, the NASDAQ Composite would be up 32%, the ARK Innovation ETF would be up 41%, the Russell 1000 Pure Value index would be down 2%, and we would still return 13.1%, we would want to ask, “How the heck did that happen?”
In the quarter, the other material winners were:
- Interest rate derivatives, where we challenged the market view that the Fed would cut interest rates this year. We continue to believe that the market is overanticipating rate cuts and we have extended that view through March of 2024;
- CONSOL Energy (NYSE:CEIX), which returned 18.5% on the company’s strong execution and formal announcement that at least 75% of its free cash flow will be returned to shareholders, principally through stock buybacks; and
- Tenet Healthcare (NYSE:THC), which returned 37% on the back of first quarter results that exceeded expectations and the company upgraded its annual outlook. After a rough patch last year due to COVID-related volume disruptions and elevated labor costs, THC now appears back on track and executing well on its ambulatory surgery center growth strategy.
We added to one small long position and initiated another small long position during the quarter.
NET Power
NET Power Inc (NYSE:NPWR) is a clean energy company with carbon capture technology that captures about 97% of the CO2 emissions in natural gas plants. It became public this quarter through a SPAC. What could be less popular than that these days? We think that just might be part of the opportunity. We believe that carbon capture will be a large market and NPWR has strong backing. The CEO is Daniel Rice, and he and his family have been extremely successful in the natural gas industry.
The company has partnered with Occidental Petroleum (NYSE:OXY), Constellation Energy (NASDAQ:CEG) and Baker Hughes (NASDAQ:BKR). NPWR is in the early stages of its commercial deployment and if it doesn’t work out, the downside is more than we would usually stomach. However, the upside also appears to potentially be a multi-bagger and we have managed our risk by sizing the position appropriately. We established our position earlier in the year around the public offering for an average price of $10.10 per share. NPWR ended the quarter at $13.00 per share.
Onex Corp
Onex Corp (TSE:ONEX) is an alternative asset manager focused on private equity and credit. We acquired our current stake at an average price of C$70.96 per share. In addition to managing third-party capital, ONEX makes substantial investments in its own deals. At the end of the first quarter, its direct investment portfolio was worth C$130.25 per share, without ascribing any value to its nearly $35 billion of third-party feegenerating assets in the asset management business.
The market has been disappointed with (1) the challenges in raising new capital for the company’s next flagship private equity fund, and (2) modest third-party asset management segment losses before carried interest. However, ONEX’s long-term track record is attractive and the asset management business is likely to generate future profits on third-party capital, inclusive of carried interest. Management appears to be attuned to the discount in the stock price and has begun aggressively repurchasing shares. ONEX ended the quarter at C$73.17 per share.
Green Brick Partners
We want to thank all of you for the very positive response to and engagement with the resolution of the Green Brick Partners Inc (NYSE:GRBK) overweight in the portfolio. Though it was a high-class problem, we are glad to have it behind us. As of June 30, GRBK is 7.5% of the Partnerships’ portfolio. It remains a top 5 position, which is merited by its cheap valuation, strong growth prospects and superior market position. The reduction of GRBK’s concentration in the portfolio should assuage most concerns about it becoming too big of a percentage of the Partnerships.
We closed long positions in Civitas Resources and Global Payments.
- Civitas Resources Inc (NYSE:CIVI) (formerly Extraction Oil & Gas) was a small investment that we initiated in 2019 by purchasing Extraction’s distressed debt before it went bankrupt. The reorganization was successful and our entry price proved to be quite favorable relative to the company’s owned resources. After the recent announcement of a large acquisition outside its core region, we chose to exit the investment at a 35% IRR.
- We exited Global Payments Inc (NYSE:GPN) with a -6% IRR after we became uncomfortable with the company’s increasingly large adjustments to reported numbers and an abrupt CEO change.
At quarter-end, the largest disclosed long positions in the Partnerships were Black Knight, Brighthouse Financial, CONSOL Energy, Green Brick Partners and Vitesco Technologies. The Partnerships had an average exposure of 107% long and 84% short.
Best Regards,
Greenlight Capital, Inc.
Read the full letter here.
