The stock market continues to surge, but Greenlight Capital’s David Einhorn is not excited about the bull market. The value-driven hedge fund, which has significantly underperformed the market all year, is warning investors not to expect that to change anytime soon.
“We are likely to continue to underperform a rising market, as we have all year, but we don’t wish to position ourselves to lose money should the market continue to rise,” Greenlight states in its second-quarter letter, dated October 15 and obtained by Institutional Investor.
The reason: The already conservatively positioned hedge fund manager thinks the market is in the later stages of a bull market and doesn’t want to be badly hurt on the way down.
“The market isn’t just making all-time highs,” the firm tells clients in the letter. “It is, by many measures, the most expensive stock market that we have seen since the founding of Greenlight.”
The hedge fund, which was up just 9 percent for the year through September — compared with nearly 21 percent for the S&P 500 — has a gross exposure of 97 percent and a short exposure of 64 percent, for a net long exposure of just 33 percent. In the letter, Greenlight — which traditionally signs the missives, not Einhorn — points out that legendary investor Warren Buffett has been selling “large swaths” of his stock portfolio and building enormous cash reserves, suggesting a long-term view.
Although Greenlight stresses it is not calling the current market a bubble, it notes that the dividend yield is low and the P/E ratio is “elevated” even as corporate earnings are cyclically high, “if not top-of-cycle.” The firm says that unlike in the past, tech stocks are not the only ones with what it calls “nosebleed valuations,” adding, “It is easy to find mature, industrial businesses with cyclical exposure and growth prospects that aren’t materially better than the current nominal GDP growth rate that currently trade for 30-50 [times] earnings.”
For these reasons, the portfolio is maintaining its conservative positioning, as reflected in the low net exposure.
Greenlight’s quarterly letters always provide interesting insights into the high-profile manager’s portfolio. II regularly reports on the monthly results, though there is no way to know how the fund is positioned or which investments or strategies are driving or detracting from results — except for U.S. common stock longs, which are disclosed to regulators on a quarterly basis.
For example, whereas II has previously reported that Greenlight has benefited from its positions in gold and Green Brick Partners and that ODP Corp. has been a drag on performance, the letter points out that in the third quarter Greenlight had a “material loser” in a housing-related short — without identifying the stock.
“We believe the company is structurally unprofitable and faces looming debt maturities that could be challenging to refinance at a reasonable interest rate,” Greenlight says. “Nonetheless, it was a strong period for all things housing-related as the sector celebrated the move lower in yields.”
Greenlight also states that in the third quarter it lost money on equity index hedges. At the same time, its macro portfolio had “another strong quarter, driven by the sharp rise in the price of gold.”
In the letter, Greenlight says it did not have any new positions “to reveal” in the third quarter, but tantalizingly tells investors it has identified three new longs that it will likely discuss in the near future. However, it is still building its positions and doesn’t want to tip its hand.
