David Einhorn Is Wondering If Value Investing Even Works Anymore

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  • Is there a ‘new paradigm for valuing equities?’ he asks
  • Firm also disclosed stakes in Tempur Sealy, HP Enterprise

Hedge fund manager David Einhorn is wondering if value investing -- the strategy he’s famous for following -- remains viable.

In a letter to investors Tuesday, Einhorn expressed frustration that growth stocks have outperformed value stocks -- and questioned whether investors are being clear-eyed when considering equity values.

David Einhorn

Photographer: Michael Nagle/Bloomberg

“The persistence of this dynamic leads to questions regarding whether value investing is a viable strategy,” Einhorn wrote in a letter to clients of his Greenlight Capital that was seen by Bloomberg News. While the “knee-jerk instinct” is to think that the cycle must be about to turn around, he said he doesn’t know if that’s going to happen.

“After years of running into the wind, we are left with no sense stronger than ‘it will turn when it turns,’” Einhorn said. “Perhaps there really is a new paradigm for valuing equities and the joke is on us. Time will tell.”

The Russell 1000 Value Index has returned 9.7 percent in 2017, while the Russell 1000 Growth Index has gained 24 percent. So it’s little wonder that he questions whether the market is valuing companies based on their disruptiveness, penchant for social change or ability to advance beneficial technologies, even at the expense of current and future profits.

As an example, he pointed to Amazon.com Inc., a company his firm has wagered against, that revealed “a much lower level of long-term structural profitability,” causing consensus estimates to drop. Yet the shares fell less than 1 percent in the third quarter.

New Stakes

“Perhaps, simply being disruptive is enough,” he said.

Greenlight disclosed in the letter that it has taken new stakes in mattress maker Tempur Sealy International Inc. and Hewlett Packard Enterprise Co., the hardware and service provider spun off from Hewlett Packard Inc. in 2015.

It also said the firm’s hedge funds returned 6.2 percent in the third quarter, recouping losses suffered earlier in the year and bringing profits this year to 3.3 percent.

The New York-based firm said markets have overestimated the impact of Tempur Sealy’s break-up with retailer Mattress Firm Holding Corp., which was responsible for 21 percent of its sales, according to the letter. Greenlight thinks that the company could earn better margins through other retail channels, and that brand loyalty, particularly to Tempur-Pedic mattresses, will keep customers buying the company’s products.

Hewlett Packard Enterprise, which spun off some of its business lines earlier this year, stands to reap the benefits of selling servers, storage and networking equipment, Greenlight said. But separation-related expenses have recently weighed on earnings.

Tempur Sealy shares gained 1.2 percent at 12:38 p.m. in New York, while Hewlett Packard Enterprise rose 0.6 percent to $14.33.

Greenlight also said its largest disclosed long positions at the end of the quarter were AerCap Holdings NV, Bayer AG, Consol Energy Inc., General Motors Co. and gold. Einhorn, who unsuccessfully pressured management to change GM’s stock structure earlier this year, has seen the automaker rise. Shares of GM climbed to a record Tuesday as the company released earnings.

Read more about GM shares here

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