Market Commentary: $1.7 Billion Fund Bets Massively On 1 Stock

David Einhorn has made a name for himself as the founder of Greenlight Capital, which manages around $1.7 billion at last count in Q3 2023.

Interestingly, the fund has made a massive bet on another company with Green in its name, Green Brick Partners. It’s an unfamiliar name to many investors and even those who do know of it may wonder why such a huge position was established by Einhorn and his investment team. We investigate.

Key Points

• David Einhorn’s Greenlight Capital has made a significant investment in Green Brick Partners, a lesser-known homebuilding company, raising questions about the strategy behind this large stake.
• Green Brick’s strong valuation, evidenced by a potential 36.1% upside and robust financial metrics like low P/E ratio and high returns on equity and invested capital, underpins the investment decision.
• Despite selling a part of his Green Brick shares, Einhorn retains a substantial portion in his portfolio, indicating ongoing confidence in the company’s growth prospects.

Why Green Brick Partners

When ordinary investors makes a bet in their portfolio, they are frequently wowed by some news, whether it’s a passing headline, a fundamental shift such as positive earnings or maybe even a technical breakout. But a professional fund manager has to consider something else also, opportunity cost.

In the words of Warren Buffett, if you could buy just 20 stocks in your whole investing career, and each one represented a hole in a punch card, you would probably be very selective about which purchases you made if limited to 20 notches.

You can’t simply buy one company because it’s showing good signs but rather it has to have the crucial foundation and be better than all other stocks to warrant a purchase.

To make a huge bet means, it has to be all the more compelling versus any other company. Yet that’s precisely the bet Einhorn made with Green Brick Partners. Why?

The simple answer appears to be plain to see in the valuation. Green Brick is a diversified homebuilding and land development company that operates in Texas, Georgia, and Florida and presently has 36.1% upside to fair value according to a discounted cash flow analysis.

But there’s more to it than meets the eye. Whether you examine the company through the lens of cash flows, profitability, or growth, it comes out on top. And with a P/E ratio of just 8.3x it’s clear why the company is attractive to a value investor like Einhorn.

On profitability metrics, such return on equity, which sits above 24% and return on invested capital, above 23%, the company shines brightly too relative to its peers.

Time to Buy Green Brick Partners?

While many of the financials look attractive and it’s clear why Einhorn has made such a bit bet, it’s also noteworthy that one of his biggest sells this past quarter was the very same stock.

We don’t think that’s as a big of a red flag as it may seem at first glance. After all, Green Brick is already up 95% year-to-date so it seems that Einhorn may have been keen to lock in some profits on his large stake.

The fact that the position still represents close to a third of his overall portfolio suggests that he and his investment team believe still more upside is to come. Given the current price-to-earnings ratio it’s hard to argue against that being a reasonable forecast.

Ideally a pullback would provide an opportunity to get in without chasing the company from a technical perspective but fundamentally the upside opportunity still appears sufficient to warrant an entry.