Contrarian Hedge Funder Up 36% In 2022, Makes New Buy
“We believe we are in the middle stages of a bear market.”
That’s one of the main points in the latest letter written by David Einhorn of Greenlight Capital.
It really stood out to us too.
Not because it’s too dramatic. But because it’s probably about right.
Every major economic measure is trending the wrong way. There’s little to get excited about. And stocks are up.
That combination has, can, and will again happen in bear markets.
That’s why we're taking a close look at Einhorn’s latest Greenlight Capital letter.
The timing couldn’t be better given the market conditions and how well Einhorn has played them.
For example, his fund gained 36.6% last year by mainly betting against “innovation” stocks as their absurd valuations came crashing down.
The letter made two astute points that really stood out to us.
The first was a simple way to avoid getting crushed in the next legs of the current bear market.
The second was a surprising buy that Einhorn just started accumulating.
Both could be a big help in making 2023 a good year for you.
You can follow this link to check out the letter posted over at ValueWalk.com.
Or you can read on below for our focus on those two points.
Definition Of A "Bubble Stock"
The first point from the letter we wanted to cover was the way to avoid getting crushed.
Einhorn and Greenlight have created a simple measurement for the stocks that could still lose big.
They call them a “bubble stock.”
And here’s the definition from the letter:
We define a bubble stock as one that if we look at the company’s current and projected financials – counting stock compensation as an actual expense – and perform a traditional valuation analysis, it could fall at least 80% and still not appear cheap to us.
That’s as simple as it gets.
Look at basic fundamental value measure like Price-to-Earnings (P/E) or Price-to-Book (P/B).
If it’s richly valued (e.g. P/E of 400 or P/B of 25).
And could fall by 80% and still not be cheap (e.g. collapsed to a P/E of 40 or P/B of 5).
Then it’s a “bubble stock” and the risks likely far outweigh the potential rewards.
There were many of these back in 2021 and 2022.
There are still few out there.
We scanned and found anl EV charging company, autonomous flying compnay, and more than one EV maker that could easily fall another 80% and still not be cheap.
If you have any of these, run them through this quick test.
You will be glad you did during the next correction.
But that’s just part of it.
One Stock He's Buying
Despite profiting so massively by betting against bubble stocks and believing we’re in the middle of a bear market,
Einhorn isn’t all negative.
In fact, they revealed an interesting stock his firm recently started buying.
The company is Tenet Healthcare (THC).
Tenet Healthcare is the largest outpatient ambulatory surgery center operator in the United States.
It has more than 100,000 employees.
And it sits at the center of two megatrends – an ageing population and the concomitant rise in demand for healthcare services.
The healthcare sector has been one of the few bright spots in stocks in 2022.
But Tenet was largely left behind and that’s likely largely due to the pandemic.
Tenet’s core services aren’t the type that were on the front lines of the pandemic.
The “elective” category of surgeries and services were the first to get cut when the pandemic lockdown begins.
Tenet actually got hit with a major setback. Tenet’s revenues actually dropped from $4.52 billion in Q1 of 2020 to $3.65 billion in Q2 of 2020.
The thing is though, the total need for the types of procedures Tenet provides didn’t go away, they were just delayed.
That has helped make what Greenlight sees as one of the few remaining value plays in healthcare stocks.
Here’s their explanation from the annual letter:
During 2022, the company lowered its guidance due to COVID and inflationary headwinds, resulting in its shares declining by more than 50% year-to-date through late October.
We believe this pullback offered an attractive opportunity to participate in the company’s transformation, as we expect its [ambulatory surgery centers] growth to remain strong and it's now smaller hospital portfolio to improve from both a cost and volume perspective.
We acquired our shares from late December through the beginning of January for an average price of $48.61, or 8.7x 2023 consensus earnings.
THC recently announced and began its plan to repurchase about 20% of the outstanding shares by the end of 2024.
That’s their rationale.
Like it or not, they’re thinking differently.
And that’s going to be the key in 2023.
Be Better In A Bear
We reiterate our point from the start of this – we’re still probably in the middle stages of a bear market.
Last year was a bad one for most investors, but it hardly reached the brutality of full bear markets.
That’s why few of the world’s best and most experienced investors believe we’ve passed through the end of the bear.
However, there are actions you can take to prevent more pain and get more gain.
One, check your portfolio for “bubble stocks” that meet the definition above. If you have them, be aware of the risks and determine if it’s worth it for you.
Two, find the occasional values within sectors that aren’t facing a recession. Tenet, a beaten down healthcare stock, is a great example of potential winners in a bear market.
If you do those two things, you will more than just survive the bear market, but you will be in position to make the next bull a potential life-changer because you did so well before it.
