Greenlight Capital's David Einhorn tells investors why he's adding to his bet against Netflix, and say he's shorting corporate credit because ratings agencies have been 'complacent'

• David Einhorn's Greenlight Capital is short one of hedge funds' favorite stocks, streaming giant Netflix, because of increased competition from other streaming services and the loss of two series the service has had exclusively: "Friends" and "The Office."
• The firm is also bracing for a recession with short positions against indices tracking US corporate credit and high-yield credit. It also has a long position in gold, among its top 10 positions.
• The firm scored nearly 14% returns for 2019, the letter states, driven by a return of 37.4% from its long positions. The firm's short positions, which also include a bet against the surging Tesla, lost money.
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Netflix's stock bump at the end of 2019 - it's jumped more than 20% since the end of October - gave David Einhorn another chance to short it.

Einhorn's Greenlight Capital told investors in its fourth-quarter letter that the firm still thinks the streaming service is overvalued thanks to the entrance of new streaming services like Disney Plus, and the loss of series like "Friends" and "The Office."

"To the extent the market sees the NFLX growth story as 'busted,' there is a lot of downside to the shares. At present, NFLX burns several billion dollars a year in cash and has accumulated a heavy debt load, even before considering future content commitments. Of course, NFLX could service the debt and de-lever by raising equity - but doing so would be a cold admission that the party is over. We doubt management will rush to do that," the letter states.

Greenlight declined to comment on the letter. Netflix did not immediately return a request for comment.

Greenlight returned nearly 14% in 2019 after a tough stretch, including a disastrous 2018, but the performance was driven by the firm's long positions. The firm's shorts, which includes a bet against Tesla, which Einhorn presented at the Sohn Investment Conference in New York in May, lost money for the year, the letter states.

The firm is also bracing for a recession. Among its 10 largest positions are a long position on gold and a short against US corporate credit and high-yield credit.

"Credit spreads are at cyclical tights even though (a) the economy appears to be decelerating, (b) we are far along in the economic cycle, (c) corporate debt has exploded, and (d) rating agencies have been complacent by allowing debt/EBITDA ratios to expand without downgrading the underlying credits. At current spreads, we believe that the risk/reward in corporate credit is asymmetric and unfavorable," the letter states about the credit environment.

The firm wrote that gold is "a hedge in our portfolio against adverse outcomes related" to the Federal Reserve's decision to cut interest rates while unemployment is low and the balance sheet is large.

The firm also announced two new long positions it took in the fourth quarter in the letter: DXC Technologies and Software AG. DXC is a spin-out following the Hewlett Packard and Computer Sciences Corporation in 2017, and the Greenlight is high on its potential as continues to pay down its debt. Germany-based Software AG is moving to a subscription-based business that Greenlight believes will pay off.