Greenlight full 2011


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Greenlight full 2011

  1. 1. January 17, 2012Dear Partner: Greenlight Capital, L.P., Greenlight Capital Qualified, L.P. and Greenlight Capital Offshore(collectively, the “Partnerships”) returned 9.7%, 8.8% and 8.5%1 net of fees and expenses,respectively, in the fourth quarter of 2011, bringing the respective full year returns to 2.9%,2.7% and 1.9%.1 Since inception in May 1996, Greenlight Capital, L.P. has returned 1,685%cumulatively or 20% annualized, both net of fees and expenses.To summarize the year: Never has so much work gone into making 2%. For all its ups anddowns, dramatic headlines, and extremely high daily volatility, the market ended the year justabout where it started. The S&P 500 index closed within a tenth of a point of its openingprice. Other developed equity markets did worse. Most European markets were down doubledigits, the Japanese Nikkei index fell about 17%, and many emerging markets declined morethan 20%. While outperforming the S&P 500 has never been our goal, this is the 13thconsecutive year that we have done so, though this time by a trivial margin.Throughout the year we found very few places to make money, but we likewise kept ourmistakes to a minimum. Our largest winner by far was our short of First Solar (FSLR), whichfell from $130.14 to $33.76 per share and was the worst performing stock in the S&P 500.We also did well investing in various credit default swaps on European sovereign debt. Forthe second year in a row, our biggest loss came from positions designed to capitalize on aneventual weakening of the Yen. These positions cost us only slightly more than our positionin Sprint (S), which declined from $4.23 to $2.34 per share in 2011.For the most part, our long portfolio went sideways. A raft of large holdings includingArkema, Aspen Insurance, CareFusion, Delphi, Delta Lloyd, Ensco, Marvell Technology,Microsoft, NCR, Pfizer (exited) and Travelers (exited) generally met or exceeded ouroperating expectations, but combined to generate an insignificant return. Even Apple, withsales and earnings growth of about 70%, saw its stock appreciate by just 25%. Perhaps theold saw about “cheap stocks getting cheaper” applies. However, these are all good businesseswith good prospects. We believe that at some point the Partnerships will be better rewardedfor these holdings.The global environment is very complicated. On the one hand, the Federal Reserve has takena much-needed break from quantitative easing (at least for the moment). Accordingly,inflation in oil and food has abated, providing relief to the U.S. economy. Bearish forecaststhat the U.S. was headed back into recession proved wrong for the third time since the end ofthe last recession.1 Source: Greenlight Capital. Please refer to information contained in the disclosures at the end of the letter. 2 G rand Cen tr a l Tower  140 East 45 t h S tr e e t, 2 4 t h Floor  N ew Yo rk, NY 10017 Phon e: 212-973-1900  Fax 212-973-9219  www.g reen ligh tcap ital. com
  2. 2. Page 2On the other hand, Asia appears to be in much worse shape than it was at this time last yearand could be a drag on the world economy going forward. Very few people trust any of theeconomic data coming out of China, making it difficult to gauge the situation there. Some ofthe smartest people we know have very dim views. The Chinese have been a leading growthengine for the last two decades and are largely credited with leading the world out of therecession in 2009. A change in their economic circumstances could really upend things.Finally, the European currency crisis has continued to worsen. The last year and a half hasbeen an endless repetition of the dynamic depicted below: Crisis Deepens Solution has Announcement no substance of meeting to or won’t work solve everything (stocks fall) (stocks rise) Announced solution Summit (champagne party) (stocks peak)The cycle looks like this: Time passes and the crisis deepens. Markets, eternal creatures ofhabit, begin to reflect the ensuing fear. Then, just as things appear ready to unravel, there is areprieve, as red headlines race across the screen: “Sarkozy and Merkel to Meet at Deauville”,“Obama Phones Cameron”, or "Christine Lagarde Waves From Bus”. The market jumps.Youd think the media would quit falling for this charade, but having run out of cleverheadlines to describe the impending doom — ‘Eurogeddon’ Really? — they herald everybriefing, meeting, assembly, and conference call.The market embraces these announcements as eagerly as the media, behaving as if any and allcommunication is equally constructive, and likely to yield a solution. The market continuesto rise until the day of that summit, as all ears await a Grand Communiqué. Within minutesof any proclamation, the market may cheer with a final, celebratory spike. Upon evaluationof the actual statement, it becomes clear that either nothing has truly been agreed upon, or that
  3. 3. Page 3the plan is insufficient, impractical or just won’t work. The market sells off and the crisisdeepens some more. Lather. Rinse. Repeat.Nonetheless, everyone is looking to these leaders for a solution. And it’s understandable thatspeaking and meeting are necessary steps. Yet, despite the endless telephone calls andsummits, all we hear are repeated promises to “do whatever it takes,” which seems to includeeverything except making the necessary sacrifices that might actually resolve the crisis.The latest solution is a work-in-progress treaty being heavily negotiated that, in its currentincarnation, will only need to be ratified by a subset of the Eurozone countries. While theleaders have committed in principle, there is significant risk that once the details emerge (andthe necessary electorates are consulted), we will discover that some leaders pledged with theirfingers crossed and, as with prior efforts, this too will fail to get the job done. 2012 may bethe year in which the currency crisis will no longer be kept at bay by politicians buying timewith empty promises. Maybe the fall of the Euro will be the 2012 catastrophe that theMayans predicted.With these things in mind, our current strategy is to own cheap stocks of good businesses,largely in the United States. We are more net long equities than we have been in some time,as we believe that many stocks have reached a point where they are simply cheap enough toown even if some trouble awaits us. We are prepared for problems in Asia by continuing tospeculate on a much weaker Yen. We have hedged the currency on our European equities,and continue to believe that European sovereign bond prices will fall regardless of whetherthe crisis is resolved through sovereign default or money printing. Finally, we continue tohold gold and gold mining equities, reflecting our concerns that global fiscal and monetarypolicies continue to tempt fate.In the fourth quarter, the Partnerships made gains on both our long and short portfolios, as themarket rose and recovered most of its third quarter loss. While our shorts often fall prey to“man-made” disasters, it was unusual to see one of our longs benefit from a natural disaster.Floods in Thailand caused significant damage to many of Seagate’s (STX) competitors andcomponent suppliers. STX’s hard drive manufacturing facilities were relatively unharmed bythe flooding and the company has been able to capitalize on the resulting shortages, which hasled to a dramatic improvement in the company’s near-term prospects.The short portfolio had two significant winners in the quarter: Green Mountain CoffeeRoasters (GMCR) and FSLR. GMCR fell after announcing disappointing quarterly resultsthat had been widely anticipated to beat expectations. The market also took little comfort inGMCR’s failure to provide any substantive response to the questions we raised at the ValueInvesting Congress, other than a blanket denial of wrongdoing. FSLR shares collapsed alongwith solar panel prices. The Solyndra scandal also hurt the company, as the Department ofEnergy denied FSLR some subsidies that had been baked into expectations. Ultimately,FSLR changed management and dramatically cut guidance. The Partnerships had no materiallosers during the fourth quarter.
  4. 4. Page 4During the quarter, the Partnerships established a new position in Dell (DELL) and re-established a position in Xerox (XRX).DELL is a large seller of computer and technology products. We established our position atan average price of $15.53. DELL is another example where the recent business performancehas exceeded the recent stock performance. While the computer business is mature, DELLhas broadened its offerings over the last few years, so that about half its sales and more thanhalf of its gross profits come from other products. DELL has roughly $7 per share in net cashand investments and currently earns about $2 per share (up from $1.50 in 2010).Accordingly, DELL’s P/E multiple is about 7x, and net of the cash and investments, it is lessthan 4x. This reflects a valuation usually associated with collapsing businesses. We expectDELL to continue to grow its earnings per share, albeit at a modest rate.Over the years, DELL has done a miserable job of allocating capital. During the dot-comheyday, when the P/E multiple was sky-high, DELL routinely plowed every available dollarback into share repurchases. After the tech bubble burst and the P/E came down to earth, itopted to hoard cash and pay fancy multiples to acquire growth. More recently it seems tohave figured out that buying back stock at nosebleed prices makes no sense, but sharerepurchases at bargain prices can add real shareholder value. During the first three quarters of2011, DELL repurchased 7.5% of the company and has the balance sheet to do much more.DELL shares ended the year at $14.63 per share.XRX is a document management provider that entered business process outsourcing when itacquired Affiliated Computer Services (ACS) in February 2010. The combination allowsXRX to sell more value-added services to its current customers and apply XRX’s technologyto deliver ACSs services more cheaply. This is our second investment in XRX since theacquisition. The first time, we bought with the stock price around $9.35, and sold with amodest gain over concerns about XRX’s Japanese exposure after the earthquake. That issueappeared fully discounted by the market during the fourth quarter when we re-established aposition at $7.61 per share, which is less than 8x estimated 2012 earnings. In the first ninemonths of 2011, XRX signed a significant amount of new multi-year outsourcing servicescontracts. XRX has been aggressively cutting costs within the legacy ACS organization.Over the long-term, XRX is expecting over 6% revenue growth and 10-15% adjusted EPSgrowth. XRX expects to spend $1.0-$1.4 billion on share repurchases in 2012, which shouldmake a good dent in the share count given its current equity capitalization of $11 billion.XRX shares ended the year at $7.96 each.  We exited several significant positions during the quarter. We sold Becton Dickinson (BDX)with a slight gain in response to disappointing guidance given with the release of the thirdquarter earnings. We sold CVS because it had appreciated and we wished to redeploy thecapital into cheaper ideas. We sold Employers Holdings (EIG), a company that could simplynever execute over the nearly five years that we held the stock, at a break-even result.Finally, we exited Travelers (TRV), with a double digit return, because the recent losses dueto various catastrophes have hampered its share repurchase program, causing us to cut ourforward earnings forecast. On the short side, we closed out our FSLR position. This was oneof the most profitable shorts in the history of the Partnerships. We also closed out our short of
  5. 5. Page 5Diamond Foods (DMND) which, while small, was one of the fastest performing shorts in ourhistory.Greenlight Capital, Inc. and its affiliates registered as investment advisers with the Securitiesand Exchange Commission (SEC) effective as of January 4, 2012. Over the last six monthswe have prepared for registration and we don’t foresee any operational changes. We havepromoted Sean Farrell to the role of Chief Compliance Officer. You can find the Form ADVon the SEC’s website at continue to be gold acquirers, in this case hiring Mitch Golden to be co-PM of GreenlightMasters, our fund of funds. Mitch’s previous experience includes working in private equity atOak Hill Capital, and as an analyst at both RH Capital and most recently at SenatorInvestment Group. Mitch earned an MBA from Wharton after undergraduate studies atStanford University. Welcome Mitch!Emily Proctor has joined us as an Executive Assistant. Emily has a degree in Anthropologyfrom BYU and an M.A. in Women’s Studies from George Washington University and sharesher full name with a hiking trail in Vermont. The eponymous route runs for nearly 13 milesthrough the Breadloaf Wilderness, and is rated strenuous by multiple trail guides. For ashorter, easier hike, we suggest the David Einhorn Trail. Start at the pile of breadcrumbs inthe kitchen and follow the trail of spilled coffee all the way to David’s office. WelcomeEmily!Our long-time Office Manager Camille Granato is retiring. For those of you who have beenwith us since the early days, you might recall that Camille was once our entire operations andadministrative team. With our current operations staff of sixteen, we can almost replicateCamille’s single-handed productivity and are reluctantly willing to let her retire. We wish herthe best and will miss her dearly!At quarter end, the largest disclosed long positions in the Partnerships were Apple, GeneralMotors, gold, Market Vectors Gold Miners and Microsoft. The Partnerships had an averageexposure of 93% long and 53% short. “The greatest enemy of knowledge is not ignorance; it is the illusion of knowledge.” --Stephen HawkingBest Regards,Greenlight Capital, Inc.
  6. 6. Page 6The information contained herein reflects the opinions and projections of Greenlight Capital, Inc. and itsaffiliates (collectively “Greenlight”) as of the date of publication, which are subject to change without notice atany time subsequent to the date of issue. Greenlight does not represent that any opinion or projection will berealized. All information provided is for informational purposes only and should not be deemed as investmentadvice or a recommendation to purchase or sell any specific security. While the information presented herein isbelieved to be reliable, no representation or warranty is made concerning the accuracy of any data presented. Alltrade names, trademarks, and service marks herein are the property of their respective owners who retain allproprietary rights over their use. This communication is confidential and may not be reproduced without priorwritten permission from Greenlight.Performance returns reflect the total returns, net of fees and expenses, for an IPO eligible partner. The 2011returns for Greenlight Capital, L.P. and Greenlight Capital Qualified, L.P are net of the modified high-watermark incentive allocation of 10% and reflect the returns for partners who were invested on or prior to January 1,2008. The 2011 returns for Greenlight Capital Offshore reflect our standard 20% incentive allocation.Performance returns for Greenlight Capital L.P. since inception reflect the total returns, net of fees and expenses,for an IPO eligible partner and are net of either the modified high-water mark incentive allocation of 10% or thestandard 20% incentive allocation applied pursuant to the confidential offering memorandum on a monthly basisfor a partner who invested at inception.Performance returns for 2011 are estimated pending the year-end audit. Past performance is not indicative offuture results. Actual returns may differ from the returns presented. Reference to an index does not imply thatthe funds will achieve returns, volatility, or other results similar to the index. The total returns for the index donot reflect the deduction of any fees or expenses which would reduce returns.All exposure information excludes credit default swaps, gold, currency positions/hedges and other macropositions. Weightings, exposure, attribution and performance contribution information reflects estimates of theweighted average of Greenlight Capital, L.P., Greenlight Capital Qualified, L.P., and Greenlight CapitalOffshore, and are the result of classifications and assumptions made in the sole judgment of Greenlight.Positions reflected in this letter do not represent all the positions held, purchased, or sold, and in the aggregate,the information may represent a small percentage of activity. The information presented is intended to provideinsight into the noteworthy events, in the sole opinion of Greenlight, affecting the portfolio.THIS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUYANY INTERESTS IN ANY FUND MANAGED BY GREENLIGHT OR ANY OF ITS AFFILIATES. SUCHAN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY INTERESTS MAY ONLY BE MADEPURSUANT TO DEFINITIVE SUBSCRIPTION DOCUMENTS BETWEEN A FUND AND AN INVESTOR.