Editor’s note: Wall Street is full of narratives and popular stocks…

But according to our colleague Gabe Marshank, the truth about a company’s potential lies behind the buzz of positive headlines and encouraging projections.

In today’s Masters Series, Gabe explains why you must understand how to look past a company’s “story” in order to properly assess its value…

How I Helped David Einhorn Make Millions Betting Against Oil Companies

By Gabe Marshank, editor, Market Maven

“If you ever met anybody from Texas, those guys know how to gamble, and if you let them stick a hole in the ground with your money, they’re going to do it.”

That quote, from famed investor Stanley Druckenmiller, was the crux of the most unforgettable stock pitch I’ve ever helped deliver.

It was May 2015, and my boss at Greenlight Capital, David Einhorn, was standing on stage at the Sohn Investment Conference.

Behind the scenes, I had spent the previous few months living in PowerPoint and combing through data to create a presentation for David cheekily titled “Meet the Frackers.”

The 92-slide presentation took aim at a group of overleveraged, underperforming U.S. shale oil companies…

The result was millions in profits for Greenlight and its investors… and valuable lessons that still hold true a decade later.

By the time David gave the presentation, he was already a legend at the Sohn conference. His presentations famously moved stocks.

In 2002, he accused private-equity firm Allied Capital of fraudulent accounting practices. The stock dropped 11% following his presentation and triggered a five-year investigation from the U.S. Securities and Exchange Commission (“SEC”) that ultimately validated his claims.

Six years later, on the same stage, he put Lehman Brothers in his crosshairs. He questioned the company’s accounting practices and exposure to toxic real estate assets, and he methodically dissected its financial statements. Four months later, Lehman went under. At the time, it was the largest corporate bankruptcy in U.S. history.

David’s appearances at Sohn became so influential that investors nicknamed it the “Einhorn Effect” – a swift market reaction to whatever company he discussed that year. That meant we had to bring our best idea to the stage every year.

In the spring of 2015, David and I started digging into a strange pattern in the U.S. shale oil industry. What we found eventually became the theme of that year’s Sohn presentation.

We started with a simple question: If these oil companies were so successful, why did they need so much fresh capital?

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What we uncovered was staggering. The largest public drillers, like Pioneer Natural Resources (which we called the “motherfracker”), had raised billions of dollars from investors but had never turned a profit, even with oil at $100 a barrel.

Instead, their capital expenditures routinely exceeded not just their profits, but sometimes even their total revenues.

In other words, these companies were essentially machines that ate capital. As my teen daughter now likes to say, “the math wasn’t mathing.” Every $28 that Pioneer was spending to drill holes was only turning into $16 worth of oil.

So I got on a plane and flew to West Texas to speak with roughnecks, landmen, and engineers. I combed through filings, built models, and stress-tested every number.

The conclusion? These companies were drilling at a loss. They were building uneconomic wells… and funding it all with cheap Wall Street capital that was hungry for yield in a zero-rate world.

When I returned from my trip, David and I sat in a conference room for a few weeks honing our pitch. The real heart of the work was turning an incredibly complex business into something easy for investors to understand.

Think of it like this: Imagine using $50 bills to counterfeit $20 bills.

We chose to publicly sell short shares of Pioneer because it was a big enough company to withstand the scrutiny. We didn’t want to put a smaller company out of business. But we were short other drilling companies, too – and we made a lot of money on those names.

Still, the Einhorn Effect sent shares of Pioneer down as much as 6% on the day…

Our broader thesis was quickly validated. As oil prices fell, these capital-intensive drillers collapsed under their own financial weight.

Years later, Pioneer sold itself to ExxonMobil (XOM). Its decade-long return was just 2% a year – less than you could earn by keeping your money in cash.

The success of our “Meet the Frackers” pitch was about more than timing. It was about a serious gap – one that anyone who looked carefully could have noticed…

One slide in our deck was titled “Deck-onomics vs. SEC-onomics.”

“Deck-onomics” was our nickname for a company’s investor relations presentation. A funny thing about these slide decks: They don’t actually need to be factually correct.

Just about every company’s presentation has a slide full of legalese that says the company can’t be held responsible for anything it says because the future is difficult to predict.

In most cases, responsible publicly traded corporations offer sober and reasonable projections. But because of the fine print, they don’t have to.

The fracking companies certainly didn’t. And we knew we had them dead to rights because of what we called “SEC-onomics.” These are the hard, audited, historical numbers that every company has to present to the SEC.

Fiddle with these numbers, and you go to jail… So as investors, we can take them as the closest thing we’ll get to the truth.

For the frackers, the difference could not have been more stark. Their PowerPoint presentations were promising fabulous returns. But the companies kept coming to investors for more money. Something wasn’t adding up, but Wall Street wasn’t picking up on it.

In 2015, shale drillers were Wall Street darlings… They made headlines, raised billions, and promised energy independence. But behind the buzz was a simple truth: They weren’t making money.

Their wells didn’t pay for themselves, and their businesses were unprofitable. Still, funded by cheap debt and relentless optimism, they kept drilling.

That disconnect between the narrative and numbers is where smart investors find opportunity. It’s not always glamorous work. It means looking at financial statements and asking hard questions.

Wall Street is full of narratives and popular stocks. Look around today and every company is promising to harness AI… just as it promised to harness the blockchain a few years ago… and just as it tried to attach “.com” to its name during the dot-com bubble.

But those stories can fall apart quickly. That’s how I helped David make millions betting against the oil drillers.

To protect and grow your portfolio, look past the “story” and follow the numbers.

Regards,

Gabe Marshank

Editor’s note: After two decades of managing hundreds of millions of dollars for some of the greatest investors of all time, Gabe left Wall Street to share his ideas with everyday investors like you.

In a brand-new presentation, he revealed the name and ticker symbol of one of his highest-conviction ideas – one he believes could lead the next wave of technological disruption, with 25X upside.

Grab a pen and paper and watch his pitch before this presentation goes offline…