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Morning Brief: Caterpillar is the Latest Short to Squeeze Greenlight Capital

The long-short manager has seen setbacks on a variety of bets this year.

Another week, another setback for one of David Einhorn’s short positions. On Tuesday it was Caterpillar, whose stock surged nearly 6 percent to $114.54 after the heavy equipment maker reported strong quarterly results. It is now up nearly 25 percent this year. In its year-end letter, Einhorn’s Greenlight Capital disclosed it had short Caterpillar and other similar industrial cyclicals that it said moved up in price following the election. In its recent second quarter letter, Greenlight acknowledged the stock has been strong this year, but asserted: “Though Chinese demand has remained strong, we think the rest of the business is poised to disappoint.” The firm also stressed that “legislative progress” toward some sort of infrastructure bill “has been minimal” and President Donald Trump’s infrastructure week “lacked substance.” Greenlight also pointed out that Caterpillar dealers rushed to build inventory in reaction to the election but that demand is not materializing. “Key commodity markets including iron ore and oil have rolled over, which should impact CAT’s earnings as capital spending decreases,” the firm said in the letter. “Bulls believe that current results are closer to trough and the peak lies years ahead. We see it differently.” And so far wrongly. In fact, according to S3 Analytics, Caterpillar short interest has declined by $1 billion this year after rising every year since 2012. Greenlight has been hurt in 2017 in large part from negative bets on hot internet, tech and new economy stocks like Amazon.com, Tesla, Netflix, software company AthenaHealth, and of course, Caterpillar.

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Sandell Asset Management has put Barnes & Noble in its cross hairs. The activist hedge fund informed the book retailer’s board of directors in a letter that it has taken “a meaningful ownership stake” in the company, saying it’s worth at least double its current $520 million market value. The letter, signed by chief executive officer Thomas Sandell, said that even if book sales were to decline, the activist believes the discounted value of the future stream of cash flows the company could expect to generate, also known as its intrinsic value, “would far exceed the current enterprise value of the company.” The hedge fund calls on the only national book seller to put itself up for sale, saying it should be owned “by an organization with both the vision and stability of capital that investors in the public market generally cannot provide.” It insists “a host of” huge internet and media companies are seeking a retail presence and that a purchase price of $1 billion — nearly double Barnes & Noble’s current value — would be a “rounding error” compared to the market caps of such potential suitors. Sandell told the company he and colleague Richard Mansouri are seeking some sort of dialogue with the board of directors as soon as possible. He sent subtle threats to potentially launch a proxy fight down the road, pointing to past successes with Bob Evans Farms and Viavi Solutions. “Our firm is prepared to stay the course to see value delivered to the true owners of a company, namely its shareholders,” Sandell said. The stock surged nearly 17 percent to close at $8.30.

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Several investment banks adjusted their price targets on Google parent Alphabet after the search giant reported mostly strong quarterly results. However, not all analysts moved in lockstep. For example, UBS Group raised its target on the “C” shares to $1080, from $1050, but acknowledged the “dueling investor narratives” regarding revenues versus costs. It identifies Alphabet’s conflicting stories as an ad business that continues to scale and surprise in its sustained rate of revenue growth, driven by mobile search and YouTube, and a cost structure it says “is in evolution.” Still, UBS told clients that the long-term bull narrative “holds firm,” adding it continues to recommend Alphabet as a core holding. Credit Suisse Group, on the other hand, reduced its target on the “A” shares to $1100, from $1150, and lowered its estimates, stressing the report was “not as straightforward” as it had hoped. But the bank noted there is no change to its thesis. It also maintained its “outperform” rating. Both classes of Alphabet fell about 3 percent on Tuesday.

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