(Bloomberg) — When a US judge unexpectedly blocked Capri Holdings Ltd.’s takeover by rival Tapestry Inc. in October, stunned hedge fund managers ran for the exits as the handbag maker’s stock plunged. For billionaire David Einhorn’s Greenlight Capital, it was a chance to double down.
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After suffering what it called a “moderate loss” on its Capri deal bet, Greenlight increased its position, wagering that the battered shares will stage a recovery based on the company’s own merits. The revelation came in the firm’s fourth-quarter investor letter, which was viewed by Bloomberg News.
“When we get an adverse result on an event like this, our instinct is to declare that our thesis has broken and take our loss,” Greenlight said in the letter dated Tuesday, in which it also disclosed an overall return for the year of 7.2%, compared to the S&P 500 Index’s 25%. “After evaluating the situation, however, we came to the opposite conclusion and added to our holdings.”
The hedge fund’s logic goes like this. During the months-long period when the deal was pending, Capri reported several “simply awful” earnings results, which made many traders concerned about its standalone value, according to the letter. But in Greenlight’s view, the results were so awful, “they likely reflected management distraction, if not neglect.”
Thus, the firm wrote, “it should not be difficult for management to reengage and achieve at least somewhat less awful results. If that happens the shares should stage a recovery.”
Already, the stock has gained more than 25% from the near-term low it touched following the negative court decision, though it remains well below the $35 level when the deal was announced in 2023. It closed on Thursday just shy of $25.
It also sees “strategic potential” for the company’s Versace and Jimmy Choo brands, according to the letter. Media reports emerged in December that Capri is exploring the possibility of a sale of the two smaller brands after its sale to Tapestry fell apart on antitrust grounds.
Greenlight was among a raft of investors that had wagered that the companies would win the merger case in the court, taking a hit when the stock tumbled almost 50% on the judge’s ruling. While acknowledging the loss, Greenlight said its position was “not large,” without elaborating.
Among other investments, Greenlight reaped a 27% annual gain on its gold bet through both direct holdings and call options. Kyndryl Holdings, Peloton Interactive Inc. and Tenet Healthcare Corp. were also among its winners.
In the same letter, Greenlight remarked on the froth around markets, specifically cryptocurrencies. It also said it bet against two levered exchange traded funds linked to Bitcoin proxy MicroStrategy Inc, — the T-Rex 2X Long MSTR Daily Target (MSTU) and Defiance Daily Target 2x Long MSTR ETF (MSTX) — which aim to generate double the return of the underlying stock. “These products are destined to fail,” Greenlight wrote.
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