Tags: Einhorn | US | Steel | stock

Einhorn's Overlooked Bear Call on US Steel Pans Out

Tuesday, 19 June 2012 08:19 AM

Hedge fund manager David Einhorn, best known for his prescient short bet against Lehman Brothers and recently, Green Mountain Coffee Roasters, hasn't received the same attention for another notable bearish call — United States Steel Corp.

The Greenlight Capital manager unveiled his negative critique of U.S. Steel at the Ira Sohn charitable conference on May 16, where more attention was focused on Einhorn's bearish views on industrial goods company Martin Marietta Materials and online retailer Amazon.com.

Yet it's Einhorn's U.S. Steel call that has outperformed, after the closely watched hedge fund manager zeroed in on the company's poor earnings, high pension costs and the impact of China's slowing demand for iron ore.

As of Monday's close, the steelmaker's stock price was down 23.1 percent since the popular conference, where top hedge fund managers reveal their best investing ideas. Meanwhile, shares of Martin Marietta have lost about 8.5 percent over the same time period and Amazon's stock is down 0.8 percent.

Hedge fund managers like Einhorn are not required to disclose their short positions. But it's widely believed that Einhorn's $7.8 billion Greenlight Capital is looking to profit from a drop in the stock price of all three companies.


The day of the conference, Einhorn's criticisms of Martin Marietta immediately cut about 14 percent off the stock before it recovered a bit that day to close down roughly 8 percent. Shares of U.S. Steel, meanwhile, ended the day down 4.9 percent.

Einhorn, who declined to comment, used his presentation to highlight that Pittsburgh-based U.S. Steel has lost money in nine of the last 13 quarters. He also pointed out that the steel manufacturer has three retirees for every current employee, meaning a lot of its revenues are going to pay pensions to former workers.

A U.S. Steel spokeswoman declined to comment.

In the first quarter, U.S. Steel reported a net loss of $219 million. In the company's most recent annual report, U.S. Steel said its pension plans were underfunded by $2.4 billion.


To some degree, it should come as no surprise that the producer of iron ore and manufacturer o f steel products for the automotive and construction industries has fallen on hard times. Oversupply of steel is always an issue for the industry, but it's particularly difficult now with declining demand from China and other fast-growing economies.

"There's always an oversupply of steel. But the magnitude of the oversupply has increased," said Mark Parr, a steel and metal companies analyst at KeyBanc Capital Markets Inc. "The supply of iron ore has come on much more rapidly than the demand has grown."

The European debt crisis has also dragged on the steel producer, which has direct exposure to Europe via its U.S. Steel Kosice mill in Slovakia, Morningstar analyst Bridget Freas added.

Freas said that while most of Einhorn's criticism was valid, s he believed it w as an "easy target." She said U.S. Steel was already viewed as weak by many on Wall Street at the time of the Ira Sohn conference.

Still, some shareholders said they are surprised by the rapid escalation of the company's failing fortunes.

"I have been surprised by the degree of the downturn in the stock," said Edward Maran, portfolio manager at Thornburg Investment Management, which own 8 million shares of U.S. Steel. "I would not have expected it to test the lows that were reached during 2008, 2009."

Other industry analysts agree with Einhorn's criticism.

"They've got some real, real problems, and U.S. Steel has clearly been the worst performer of the group," said metals analyst Charles Bradford, president of Bradford Research.

Interestingly, another top performer remains a stock that Einhorn didn't mention at Ira Sohn, but many were expecting him to unveil as this year's big short.

Shares of nutritional supplement company Herbalife have gained about 11 percent since the conference.

The stock had sold off in advance of the conference in anticipation that Einhorn would give it a negative critique. But he never even mentioned it during his 137-slide presentation.

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Tuesday, 19 June 2012 08:19 AM
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