2 Grand Central Tower
140 East 45
New York, NY 10017Phone: 212-973-1900
May 29, 2012Dear Partner:
The Greenlight Capital funds (the “Partnerships”) returned 6.8%
, net of fees and expenses, inthe first quarter of 2012.In the first quarter, the market rose steadily with eleven weeks of gains and only two weeksof trivial losses. In its relentless climb, the market took nearly every stock in our portfoliosalong with it, resulting in profits on the long side and losses on the short side. In aggregate,the longs advanced more than the market and the shorts advanced less than the market, so wegenerated positive alpha on both sides of the balance sheet.During the presentation at our annual Partners’ Dinner, we talked about a number of stocksthat have suffered multiple compression, where businesses have performed nicely, but havenot seen a corresponding uplift in their share price. Apple (AAPL) is the clearest example of this. In 2011, AAPL’s revenue grew 66% and earnings per share grew 78%. Both of thesegrowth rates greatly exceeded market expectations and even our own expectations, whichwere considerably more optimistic than consensus. Nonetheless, the stock appreciated byonly 25%. As a result of this mismatch, AAPL’s P/E multiple compressed by about one third.Several other names in our portfolio including General Motors (GM), Microsoft (MSFT),Delphi (DLPH) and Arkema (France: AKE) also suffered multiple compression in 2011. Thistrend reversed in the first quarter, with all of these companies enjoying rising share prices thatreflect both current earnings performance and some P/E multiple catch-up from last year. None of our long portfolio investments have recovered with as much fanfare as AAPL, whichsurged from $405 to $600 per share in the quarter, bringing its P/E back to where it was at theend of 2010. Yet not everyone agrees that AAPL’s stock price is merely playing catch-up toits fundamentals. Some see the stock surge as a bubble, while others go so far as to mock thatAAPL is its own asset class.Here are some of the common concerns we have heard:1.
Too many hedge funds own AAPL.2.
If AAPL’s share price doubles, it will have a $1 trillion market capitalization, andeveryone knows there can be no such thing as a $1 trillion company.
Source: Greenlight Capital. Please refer to information contained in the disclosures at the end of the letter.