Greenlight Capital Q4 2013 Letter

January 21, 2014

Dear Partner:  

The Greenlight Capital funds (the “Partnerships”) returned 6.5%,1 net of fees and expenses, in the fourth quarter of 2013, bringing the full year net return to 19.1%. Since inception in May 1996, Greenlight Capital, L.P. has returned 2,211% cumulatively or 19.5% annualized, both net of fees and expenses. The long, short and macro portfolios contributed 10.4%, 4.0% and 0.7% of alpha respectively to the gross annual return of the Partnerships; market beta added an additional 10.4%. We do not expect to keep pace with a straight up market, and we didn't – the S&P 500 index soared another 10% in the fourth quarter to end the year up 32.4%. The parabolic rise of a growing number of market-leading story stocks created a challenging environment for value investors. Speculators have momentarily accepted the ruse that, for these visionary companies, profitability would be a mistake. Eventually, the market will remember that having a disruptive product that customers will happily buy if sold near cost is not the same as having a valuable business. Philosophically, since we would not expect to be long these highfliers, the best we can hope to do is not be short them at the wrong time. For the most part, we weren’t. For the quarter, our longs modestly outperformed the S&P 500, our shorts went up less than the index, and macro (led by the yen) was a slight contributor. The big winners (alphabetically) were Apple, General Motors, Marvell, Micron and the yen. The big losers were Chipotle and U.S. Steel. Notable Quarterly Winners and Losers Stock Apple

L/S 9/30 Price Long $476.75

General Motors

Long

$35.97

Marvell Technology Group

Long

$11.50

Micron Technology

Long

$17.47

12/31 Price Comments $561.02 Shares continued their recovery as Apple launched new products to a positive reception. Earnings estimates have changed direction and are now rising. $40.87 Earnings stabilized and the U.S. government sold its remaining stock, eliminating a large overhang. $14.38 Quarterly results were a “Beat and Raise” as the company continues to gain share in a variety of popular wireless devices. $21.75 A new position (described below).

Yen

Macro Short

¥98.35

¥105.30

1

No sign of tapering in Japan. The main tool of “Abenomics” appears to be a weak yen. So, it is weakening.

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

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Stock Chipotle Mexican Grill

L/S 9/30 Price Short $428.80

U.S. Steel

Short

$20.59

12/31 Price Comments $532.78 Chipotle spent a little more on advertising and got a little boost in sales, but not enough to cover the cost of the extra ads and food inflation. Though this led to a “Miss and Lower” for earnings, the market focused on the marginally better sales. $29.50 Steel prices in North America were higher than elsewhere due to some mill outages and decent demand. Imports have thus far remained modest, primarily because the importers did not believe the high prices would last.

We added several new long ideas to the portfolio including a large position in Micron Technology (MU) and medium-sized positions in BP plc (BP) and Anadarko Petroleum (APC). MU is a manufacturer of semiconductor memory chips (DRAM and NAND flash). This isn’t our first go-round with MU; it was a large short position from January 2001 to February 2005. Back then, DRAM was a lousy industry with too many competitors selling an undifferentiated product, often below cost. In the first quarter of 2001 when the shares were trading in the low $40s we wrote: MU is valued at 6.5x current run-rate revenues and, today, generates no profits. In its best year ever (fiscal 2000), MU recorded $2.52 per share of earnings, making the current price 17x the peak earnings of a cyclical, commodity manufacturer. In the previous two years, MU lost money. At the time, the valuation was kept aloft by the hopes and dreams of sell-side analysts. In our next letter we shared the following anecdote: In an exchange of e-mails with a leading sell-side analyst who recommends purchase of MU with a $70 per share target, we solicited his justification for the current $24 billion market capitalization (let alone the $40 billion suggested by his target.) Our analyst friend explained he tried to use cyclical valuation methodologies to come up with a rationale for buying the stock but failed because such an approach suggests “the stock should trade in the teens.” However, he maintains, should we have a good pricing environment next year, “people will treat the stock the same way [as they have] and take it much higher than they should.” Lest we be unclear about his raison d’être, he added he “could just perennially stamp an underperform on MU because he can’t justify the $24 billion, but that would be boring.” He need not worry; we are fans of boring. This sort of unchecked cheerleading among sell-side analysts is by no means gone. Today, they spin different fables to justify otherwise inexplicable valuations for the latest flavor-of-the-month stocks. As for MU, a decade of poor results exposed every flaw in the business and killed any love for the stock. The sell-side groupthink has reversed: the mostly bearish analysts now contort themselves to justify earnings estimates that are too low, price targets that are too pessimistic, and stock ratings that are too negative.

GREENLIGHT®

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We established a position in MU at an average price of $16.49, marking the first time we have taken a long position in a company in which we once had a material short position. The industry has changed and so has MU. Its purchase of Elpida Memory out of bankruptcy in August 2013 marks the end of a decade of consolidation from roughly a dozen major DRAM players down to just three. Technological advances and locked-up intellectual property have made it unlikely that any new players will enter the industry in the intermediate term. MU and its competitors have signaled that they will refrain from adding capacity and will instead prioritize economic value-add. For the first time in memory, MU intends to use its excess cash flow to shrink the outstanding share count rather than build new factories. We believe the company will approach $4 per share of earnings and free cash flow in calendar 2014, and should enjoy a better multiple as investors begin to appreciate the new dynamic. The shares ended the quarter at $21.75. We established a position in BP at an average price of $47.39. The Deepwater Horizon oil spill was nearly four years ago. Since then, investors have focused on the ensuing legal cases regarding clean-up and restitution efforts, while overlooking BP’s improved return on capital in its core businesses. Allowing for more negative legal outcomes than BP has currently provisioned, we believe the company’s net asset value (NAV) is nearly $70 per share. It can therefore create substantial value by selling assets at or above NAV and using the income to repurchase stock at a significant discount. This is exactly what BP has been doing. Further, BP has restricted capital expenditures and increased dividends – all evidence of a more shareholderfriendly approach. As the legal issues subside, we expect the market to appreciate BP’s portfolio value and its improved capital allocation. In the meantime, we own an industry leader at 9x earnings with a 5% dividend yield. BP shares ended the quarter at $48.61. APC is a global exploration and production company with a high-quality upstream portfolio comprised of U.S. onshore resources, deep-water Gulf of Mexico assets, and interests in other high-potential oil and gas basins around the world. The company also owns 91% of Western Gas Equity Partners (WGP), a publicly traded master limited partnership created in 2012 to hold APC’s limited and general partner interests in Western Gas Partners (WES). In mid-December the company suffered a legal setback stemming from its 2006 acquisition of oil and gas assets from Kerr-McGee, whose titanium dioxide unit went bankrupt. With APC facing potential damages of $14 billion or $5 billion, investors dumped the shares, which we then acquired at an average cost of $78.55. Assuming a worst-case legal outcome, APC’s core valuation net of its stake in WGP and its interest in an undeveloped, but valuable prospect in Mozambique, is less than 4x EBITDA. This is cheap compared to peers that lack APC’s valuable upstream assets and exciting exploration prospects, but nonetheless trade at higher valuations. Our legal analysis suggests that the ultimate payment is likely to be the lesser of the two amounts and will be partly tax deductible. APC shares ended the quarter at $79.32. We closed out positions in Airbus Group, formerly known as the European Aeronautic Defence & Space Company (France: EADS), and ThyssenKrupp (Germany: TKA).

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We bought the shares in EADS during a sell-off in response to the company’s unpopular proposal to buy BAE Systems in 2012. EADS ultimately abandoned the merger and instead repurchased a lot of stock while also reorganizing its corporate structure to reduce the influence of several government shareholders. The shares rallied and we sold for a nice gain. We also bought TKA shares in 2012. Though management made significant progress in restructuring the company, a difficult external environment meant that asset sales and cash flow generation fell short of their hopes and ours. We exited with a very small loss. On the organizational front, we added Amanda Armstrong as an executive assistant. Amanda joins us from the fashion industry and has a bachelor’s degree from the University of Vermont. We believe that in addition to her office management experience, Amanda’s sartorial expertise will raise the caliber of our Annual Partner Dinner Tie Selection Committee. Welcome Amanda! Jaime Lester joins Greenlight as a research analyst. Jaime spent the past nine years managing Soundpost Partners. He has an MBA from Columbia and an AB in Applied Mathematics and Economics from Harvard. Though his official start date wasn’t until January, Jaime opted to begin his tenure early and join us at our annual getaway in December where he was gracious enough not to steal anyone’s thunder on the basketball court. Welcome Jaime! Most of our operations staff has relocated from the north side of our office on the 24th floor to our new space on the 23rd floor. When you come for a visit, Justin would be happy to give you a tour. The new digs are so nice that the staff upstairs wants their floor updated to match. Henry ‘Hank the Tank’ Lepone was born October 20, 2013 to Justin and Erin. Henry’s arrival added 1% to the global population of people with the last name Lepone. Justin proudly points out that the 0-6 New York Giants went 7-3 after Henry entered the world. We expect you will find it more interesting that the Partnerships made a third of the annual return since then. Finally, Alexis returned from her winter getaway married. That’s the first surprise wedding at Greenlight … ever. Congratulations to Alexis and Rob! At quarter-end, the largest disclosed long positions in the Partnerships were Apple, General Motors, Marvell Technology Group, Micron Technology and Vodafone Group. The Partnerships had an average exposure of 125% long and 70% short.

“I did three things yesterday! Now I’m supposed to keep doing things? It’s like the things never end!” — Allie Brosh

Best Regards,

Greenlight Capital, Inc.

GREENLIGHT®

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The information contained herein reflects the opinions and projections of Greenlight Capital, Inc. and its affiliates (collectively “Greenlight”) as of the date of publication, which are subject to change without notice at any time subsequent to the date of issue. Greenlight does not represent that any opinion or projection will be realized. All information provided is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. GREENLIGHT® and GREENLIGHT CAPITAL, INC. with the star logo are registered trademarks of Greenlight Capital, Inc. or affiliated companies in the United States, European Union and other countries worldwide. All other trade names, trademarks, and service marks herein are the property of their respective owners who retain all proprietary rights over their use. This communication is confidential and may not be reproduced without prior written permission from Greenlight. Unless otherwise noted, performance returns reflect the dollar-weighted average total returns, net of fees and expenses, for an IPO eligible partner for Greenlight Capital, L.P., Greenlight Capital Qualified, L.P., Greenlight Capital Offshore, Ltd., Greenlight Capital Offshore Qualified, Ltd., and the dollar series returns of Greenlight Capital (Gold), L.P. and Greenlight Capital Offshore (Gold), Ltd. (collectively, the “Partnerships”). Each Partnership’s returns are net of the standard 20% incentive allocation. Alpha and beta contributions are calculated on the gross annual returns of the Partnerships and do not reflect the deduction of management fees, incentive allocation, and other fund expenses. An investor’s actual net returns are reduced by the management fee, incentive allocation, and other fund expenses. 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 the standard 20% incentive allocation applied on a monthly basis pursuant to the confidential offering memorandum for a partner who invested at inception. Performance returns are estimated pending the year-end audit. Past performance is not indicative of future results. Actual returns may differ from the returns presented. Each partner will receive individual returns from the Partnerships’ administrator. Reference to an index does not imply that the Partnerships will achieve returns, volatility, or other results similar to the index. The total returns for the index do not reflect the deduction of any fees or expenses which would reduce returns. All exposure information is calculated on a delta adjusted basis and excludes macro positions, which consist of credit default swaps, sovereign debt, foreign currency positions, interest rate derivatives and others. Weightings, exposure, attribution and performance contribution information reflects estimates of the weighted average of Greenlight Capital, L.P., Greenlight Capital Qualified, L.P., Greenlight Capital Offshore, Ltd., Greenlight Capital Offshore Qualified, Ltd., Greenlight Capital (Gold), L.P., and Greenlight Capital Offshore (Gold), Ltd. 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 provide insight into the noteworthy events, in the sole opinion of Greenlight, affecting the Partnerships. THIS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY INTERESTS IN ANY FUND MANAGED BY GREENLIGHT OR ANY OF ITS AFFILIATES. SUCH AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY INTERESTS MAY ONLY BE MADE PURSUANT TO DEFINITIVE SUBSCRIPTION DOCUMENTS BETWEEN A FUND AND AN INVESTOR.

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