Billionaire David Einhorn warns interest rates will peak at higher level than expected; Here are 2 stocks he’s using to fight the Fed

For much of the last two years, economists and investors have kept a close eye on inflation, and more recently, on the Federal Reserve’s interest rate policy. That fast growing price increases, and the Fed’s switch to monetary tightening and higher interest rates, sparked fears of recession. But, in recent months, the pace of inflation has slowed down, and the Fed has moved back to its usual 25-basis point rate moves. Markets have breathed a collective sigh of relief

But billionaire investor David Einhorn is still taking a bearish slant on the economy and stock markets.

Einhorn, whose hedge fund, Greenlight Capital, has a long history of consistently outperforming the overall markets – has just come off a record year. His fund scored a return of 36.6% in 2022, far above the ~20% loss on the S&P 500. So, when he says that we’re in for tough times, investors will listen.

In a recent interview, Einhorn said, “I think that both long- and short-term rates are headed higher and probably higher than what people are expecting.”

Einhorn noted that the bond markets are experiencing falling prices and rising yields, with the 10-year treasury note over 4% for the first time since last November and shorter-term notes running at 5% or higher. Pointing out that higher yields in bond markets are adverse for stocks, Einhorn also said, “The Fed does want stock prices lower. They’ve made that clear. I think it would be better if they cared less about the stock market in either direction.”

To make it through these hard times, Einhorn has shifted his portfolio toward value stocks. We’ve used the TipRanks database to look under the hood at two of his top picks (both account for over 30% of his firm’s portfolio). With the prospect of higher rates and persistent inflation, the billionaire evidently thinks these stocks are ones to own right now.

CONSOL Energy (CEIX)

Einhorn’s first big holding is CONSOL Energy, which makes ~8% of his total portfolio, with a value just north of $111 million. That gives him a 5.2% ownership stake in the company.

The Pennsylvania-based mid-cap produces and exports coal – specifically, high-Btu bituminous thermal coal and metallurgical coal. The company is a major coal producer, working in the rich coal seams of the Appalachian Mountains of southwestern Pennsylvania, near the border with West Virginia. The company’s ‘Pennsylvania Mining Complex’ is capable of producing 28.5 million tons of coal annually from three large underground mines. CONSOL’s Itmann mine, in Wyoming County, West Virginia, which came online this past October and is now producing metallurgical-grade coking coal, with a targeted output near 900,000 tons per year.

In addition to its mines, CONSOL also operates a marine terminal in the Port of Baltimore. This terminal is one of just two coal terminals on the East Coast capable of serving the world’s largest ocean-going bulk haulers, and has an annual through-put capacity of 15 million tones.

While the political winds are blowing against coal, in favor of ‘green’ energy, the reality remains that the bulk of the US energy grid is powered by coal – and the fuel remains indispensable in the production of steel from iron ore. That’s the fact behind CONSOL’s solid revenue numbers for 4Q22. The company saw a total top line of $637 million, of which $537 million was defined as ‘coal revenue.’ For the full year 2022, those numbers were $2.1 billion and $2.02 billion. Year-over-year, coal revenue in 2022 was nearly double that of 2021.

In addition to rising revenues, CONSOL also saw rising earnings. Net income came to $193 million in Q4, up 65% y/y, and diluted quarterly EPS was listed as $5.39, for a 63% y/y gain.

CONSOL has committed to returning profits to shareholders, and in February the company announced the third payment of its dividend, at $1.10 per share. The annualized payment, of $4.4, gives a yield of 7.1%. That’s more than enough to ensure a real rate of return for common shareholders.

CONSOL shares have shown strong outperformance over the past year, appreciating 85%, while the S&P 500 is down 8% in the same period.

Einhorn is not the only bull out there on CONSOL. Lucas Pipes, 5-star analyst with B. Riley, also takes an upbeat stand on the stock, writing: “With currently up to 18-20M tons of export capacity, a low-cost structure, and solid balance sheet, CONSOL is willing to operate with a more flexible contract book as well. CONSOL still trades at a 47.6% 2023 and 48.4% 2024 FCFE yield on spot prices, in our view, significantly undervaluing the company’s staying power with some of the most competitive energy assets globally.”

Pipes adds a Buy rating to his commentary, and completes his stance with an $84 price target, indicating his confidence in an upside of ~35% for the next 12 months. (To watch Pipes’ track record, click here)

CONSOL has slipped under most analysts’ radar; the stock’s Moderate Buy consensus is based on just two recent ratings – but both are Buys. With shares trading at $61.94, the $82 average price target suggests room for 32% upside. (See CEIX stock forecast)

Green Brick Partners (GRBK)

Accounting for the biggest holding in his portfolio (~28%), and worth over $543 million, the next Einhorn-backed stock we’ll look at is Green Brick Partners.

The company is based in Texas and works in land development and home acquisition. In short, the company invests in land, buying up large tracts, which it can then make available to construction firms for development in the residential housing market. Green Brick will also provide financing, to underwrite the construction costs.

The combination of rising inflation and rising interest rates worked together to pummel the real estate industry last year, and Green Brick’s shares have been highly volatile in response. Nevertheless, the shares are up 40% in the last 12 months vs. the S&P 500’s 8% drop.

Despite the recent difficulties in the residential real estate sector, Green Brick reported delivering 2,916 homes in 2022, a company record. While Q4 revenues were down, falling 4.7% y/y to $431 million, full year revenues, at $1.75 billion, were up by 25%. That same pattern held true for the bottom line; Q4’s diluted EPS fell 4.8% y/y to $1.18, while the full year diluted EPS grew from $3.72 to $6.02, a 61% y/y gain.

While Einhorn has gone long on Green Brick, the Street’s analysts are taking a more cautious line. Analyst Aaron Hecht, of JMP, writes of this home developer: “Coming off two years of record-setting results, the fourth quarter saw an 11% slowdown in orders, which was superior to the homebuilder average of 55% and driven by reduced homeownership affordability. GRBK is in an advantageous position given its product location in high-demand infill locations across the Sunbelt, which has allowed it to maintain better margin than peers. Despite a number of positives working in GRBK’s favor, we believe shares are fairly valued at 1.5x book value vs. the group at 1.1x given historical ROE profiles across cycles.”

These comments back up Hecht’s Market Perform (i.e. Neutral) rating on this stock, and he has declined to set a price target here. (To watch Hecht’s track record, click here)

Overall, this stock gets a unanimous Hold rating from the analyst consensus, based on 3 recent reviews from the Street. The stock is selling for $32.41 and its $31.25 average price target implies ~4% downside from current levels. (See GRBK stock forecast)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.