Hedge Fund Doubles Down on Capri Holdings Despite Legal Setback

When a US judge unexpectedly halted Tapestry Inc.'s acquisition of Capri Holdings Ltd. in October, hedge fund managers flocked to exit as the handbag maker's stock plummeted. However, for Greenlight Capital, led by billionaire David Einhorn, it presented an opportunity to increase its position.

Despite incurring a "moderate loss" on its Capri bet, Greenlight enlarged its exposure, anticipating a recovery in the beleaguered shares based on the company's intrinsic value. This revelation was unveiled in the firm's fourth-quarter investor letter, obtained by Bloomberg News.

"Typically, when we face an adverse result, we re-evaluate our thesis and exit the position," Greenlight stated in the letter, which also disclosed an annual return of 7.2%, outperforming the S&P 500 Index's 25%. "Upon further assessment, we reached the opposite conclusion and added to our holdings."

Greenlight's rationale centers on the "dismal" earnings Capri reported during the merger pending period, which heightened concerns among traders about its standalone value. However, the firm believes these results were an anomaly, likely stemming from "management distraction."

"It should not be challenging for management to re-engage and improve performance," the firm wrote. "If this occurs, the shares should rebound."

Since the adverse court decision, the stock has already rebounded by over 25%. Notably, the company's Versace and Jimmy Choo brands possess "strategic potential," according to the letter. Rumors surfaced in December that Capri was contemplating selling these subsidiaries following the antitrust failure of the Tapestry deal.

Greenlight joined a group of investors betting on the merger's approval and suffered losses when the stock plunged nearly 50% after the judge's ruling. While acknowledging the setback, Greenlight downplayed its exposure, stating it was "not substantial."

Additionally, Greenlight realized a 27% annual return on its gold investment via direct holdings and call options. Other portfolio successes included Kyndryl Holdings, Peloton Interactive Inc., and Tenet Healthcare Corp.

In the same letter, Greenlight addressed the market's exuberance, particularly regarding cryptocurrencies. It wagered against two leveraged exchange-traded funds linked to Bitcoin proxy MicroStrategy Inc. (MSTU and MSTX), designed to double the return of the underlying stock.

"These products are doomed to fail," Greenlight wrote.