Following is the unofficial transcript of a CNBC exclusive interview with Greenlight Capital Co-Founder & President David Einhorn on CNBC’s “Power Lunch” (M-F, 2PM-3PM ET) today, Wednesday, April 3.
Greenlight’s David Einhorn: The future of value of investing is dead
Greenlight’s David Einhorn breaks down why he believes the market is ‘fundamentally broken’
SCOTT WAPNER: Tyler, I appreciate it very much. It’s good to see you, David. Thanks for being with us today.
DAVID EINHORN: Oh, it’s a pleasure. Thanks for having me.
WAPNER: Your 20th Sohn presentation, I heard you say on the stage. You have been a loyal supporter of this event.
EINHORN: Yes, it’s been a fantastic thing. It’s a great cause. It gives money where it’s really needed, initially with the pediatric hospital in New Jersey, and then later into research. And it’s become like a New York institution within the community. And I feel just grateful every year to be invited to be part of it.
WAPNER: Yes, we’re proud to be a part of it as well. So, your idea today was Solvay, a European chemicals company based in Belgium. We’re going to see a move on the pink sheets here. Belgium market, obviously, in Europe, is closed now, so it’s thinly traded as people look at it. How large of a position is that for you?
EINHORN: We own a little bit over 5 percent of the company.
WAPNER: OK. And what attracted you to that name specifically?
EINHORN: Well, we have a habit of looking at spinoffs. That’s been a core investment strategy for us for many, many, many years. We have probably invested in 50 or 60 of them. And it’s actually the highest-returning strategy we have within our portfolio. Our IRR on spinoffs is probably somewhere approaching 50 percent. And so we can identify only a few each year where we think they’re really misunderstood, they’re really misvalued. It’s hard because there’s large disclosure that people don’t want to bother to read, and people often don’t like it because they like the other part of the business. And so you get like a new shareholder base. And, sometimes, you just get a really attractive entry price.
WAPNER: You teased in your January investor letter a new long position, and you didn’t reveal it then because you were still accumulating it. Is it different than what you revealed today?
EINHORN: No, that is the position.
WAPNER: That is the position.
EINHORN: It started trading…
WAPNER: So, we learn about it today.
EINHORN: That’s right. This started trading in early December.
WAPNER: OK.
EINHORN: And we started buying it then. And then it had a little bit of a spike, and so we stopped buying it for a little while, and then we finished accumulating it. And we stopped buying a few weeks ago.
WAPNER: OK, so it’s — you said 5 percent. I mean, it’s a top five position then for you.
EINHORN: Yes.
WAPNER: Because that’s what you suggested at the time that it was going to be.
EINHORN: That’s right. It’s a top five position.
WAPNER: Wow. How often are you looking to buy stocks in this current market?
EINHORN: All the time. I mean, I show up every day trying to figure out what stocks to buy. Most days, I’m not successful and I don’t find anything that I want to buy. So it’s really exciting when we do find some new opportunities.
WAPNER: I mean, you said on the stage that it’s a great time to be a value investor. But, at the same time, you have a view about the value investing industry, which you suggest is dead. Can you elaborate on that?
EINHORN: Yes. The value investing industry and value investing are two completely different things. The value investing industry are my former peers that were paid money to manage money for other people, that spent their time researching stocks and trying to identify undervalued companies to buy. Many of them operated in long-only institutions, like mutual funds and stuff like that, and they used to be paid lots of money to identify these stocks. Well, with the shift to indexing, where trillions of dollars has been redeemed out of those strategies, those people have lost their jobs and they have lost their assets under management. So there’s a lot fewer people right now looking to try to buy undervalued companies. So, for the few of us that are still doing it, it’s kind of a unique time. It’s a much better situation than it was when there was all of this competition before. That being said, you have to recognize how the environment has changed, how markets are functioning, and what it means to be a value investor, right? Value investing, this is the idea of buying things for less than they are worth. And, right now, because there’s so little money that is actually pursuing strategies of trying to determine what things are worth and buying them for less than they’re worth, there’s many securities that are radically misvalued and undervalued. And you’re able to identify just a few securities a year, such as Solvay, which is the new one that we’re presenting today, that is so radically undervalued because there just isn’t a professional industry trying to identify and purchase these things. So the opportunity comes to us, and we can buy a company of this quality with pretty much a double-digit dividend yield, while we wait for the business to improve its operations in the few years.
WAPNER: How have you adapted to this new environment that you articulate? I mean, some may have thrown in the towel, taken their ball and gone home and said, I’m — like, I’m done. I have been doing this a long time. I don’t need to do this anymore. You’re obviously not one of them because you’re still here looking for value stocks every day. But how have you adapted?
EINHORN: Right. It was very hard because we didn’t realize what was happening for the first few years of this transition and we were doing what we were doing before and it just wasn’t working. And I — and we had some poor investment years of returns, until we eventually sorted this out. But around 2019, I think I kind of got a handle of what was actually going on in this dynamic. And what we can’t do, see, is, if our business before was trying to figure out, like, what these long-only investors were going to buy six months or 12 months before they would, so if we could buy a company at 11 times earnings, and the earnings could be 15 percent more than people thought. And you would realize that the people — that these long-only funds would realize this, they were on every call, they had analysts covering everything, and they’re paying careful attention, so that, when things came out better than expected, not only would you get the return from the 15 percent growth in the earnings. You would get a rate — a re-rating of the multiple as these institutions would come in and buy the stock. So our business fundamentally was figuring out what those people were going to do six months to a year before they figured out that they were going to do it, and then riding that along. Now, if those people don’t have any money because they’re all in passives and index funds and they’re not paying attention, companies can announce better results, and nobody cares. So we can’t buy things at 11 times, hope the earnings are 15 percent better, hope we get a 14 multiple at the end and make 50 or 60 percent over 18 months. That opportunity is not there. So we have to buy things even cheaper. So, the idea, like we have today, we’re buying a stock right now that’s below seven times earnings, and it’s paying about a 10 percent dividend yield. So it doesn’t matter if those other investors figure it out, because we’re happy to just collect 10 percent, if that’s all that we wind up doing.
WAPNER: You have declared the market is — quote — “fundamentally broken.” That’s sort of the terminology that you have used. Now, obviously you have adapted, as you said, well, because you’re coming off of a really strong year. You’re 22 percent net of fees, which I think followed one of the best years that Greenlight has ever had. So you have made the move, but you have also suggested to me that, because you think the markets are fundamentally broken, that means fewer companies are going public, right? That’s one of the ideas that you have, these — sort of this change has reverberated through the whole market structure.
EINHORN: Yes, absolutely. When I say that the market is broken, what I’m saying is, is, there’s not enough money that is being dedicated to investing, trying to identify undervalued companies and reward companies and — with new capital that have good opportunities for growth and to punish companies that don’t have such good situations, because the professional industry of figuring this stuff out has largely been eradicated. And so the main problem that comes from that is, is, you just wind up where index funds or other strategies, they’re going to buy whatever is the most overvalued thing, because they get the biggest weight in the index. So new money comes, and overvaluation becomes more overvalued, undervalued becomes even more undervalued, and values actually diverge from fair value, rather than come to fair value. But there’s other ramifications of that. Once you have the largest shareholder in every major important company be a passive fund, shareholder activism becomes nearly impossible to improve corporate governance, because if you go to one of these index funds and you say, I have an idea for how this company could improve that will make the stock price go up, they just kind of look at you and go, well, we want all the stock prices to go up.They don’t particularly — and they don’t have anybody on those proxy departments that even know how to value a company, let alone vote index shares in that kind of way. Another thing that’s come, obviously, is, is the IPO market. The S&P is making highs, right? We’re in a favorable economic environment, and yet where’s the IPO market? Why aren’t companies able to come public? And the reason is, is, companies used to do these things called road shows, and they would come to these managers, these long-only managers, and they would say, hi, I’m the mid-cap manager of the such-and-such fund. Would you like to buy my new stock? And if that person isn’t there or they don’t have any new money, there’s no one to buy that stock. And so you have a closed IPO market, even in the face of really, really favorable market conditions otherwise.
WAPNER: I want to talk about some other positions that you have within the market, because one of them, frankly, surprised me when I read one of your letters, which suggested that you — quote — “stayed committed to the turbulent regional banking industry,” and you bought more New York Community Bank in the fourth quarter. So, I guess I sat back and said, wait a minute. Einhorn is supposed to be the guy who’s saying, no, the regional banks are the ones with all the problems because of commercial real estate.
EINHORN: Yes.
WAPNER: But then you buy New York Community Bank. Why?
EINHORN: Right. Our theory was, when they did the acquisition of the failed banks — that happened roughly last March — we bought all of the regional banks that were the purchasers of the failed banks because we thought that they would get really good discounts. And we did it several times, and all of them except New York Community Bank worked. But when New York Community Bank came out with their result and took their charge, we immediately just sold all of the stock, and we exited it, actually very small loss.
WAPNER: Oh, you did?
EINHORN: Yes.
WAPNER: OK. So you’re gone from those stocks. In terms of the market overall, you have spoken before about bubble baskets of names and names that have gone parabolic because of various trends that happened to be going on at that particular time. Now, obviously, the focus is on A.I. You made jokes about A.I. during your presentation today. Steve Cohen was on our network today, said, this is not like 1999, that there’s no bubble in the market, AI is durable — that’s the word he used — and would lead to greater productivity and efficiency. You agree with that? You think we’re in a bubble? What’s your view?
EINHORN: No, I don’t particularly think we’re in a bubble. We covered our bubble basket stocks in the first quarter of last year, and, right now, all of our shorts are idiosyncratic ideas based on situations with the particular companies that are involved. We don’t have any basket short positions, right.
WAPNER: Interesting. You’re still willing to short stocks too.
EINHORN: We do.
WAPNER: Because that’s been a meaningful change in the industry too. Why?
EINHORN: We do. I think it adds a lot to our risk return profile. Shorting provides cash for you when the market goes down, because everything goes down and then you have new money to invest in other things. And I think we add value also by creating alpha on our shorts, shorting things that actually just go down.
WAPNER: I think I saw as well that you have a position in the GLD. Is that still current?
EINHORN: Yes, gold is a large…
WAPNER: Because you have talked about gold for many years. You were talking about gold before it was fashionable to be talking about gold, and now we are — we keep going up with gold.
EINHORN: Yes. And we own a lot more gold than just the GLD. We own physical bars as well.
WAPNER: Why so?
EINHORN: So, gold is a very large position for us.
WAPNER: Why have you made it so large?
EINHORN: Well, because I think that there’s a con — a problem with the overall monetary and fiscal policies of the country, and that both policies are systemically too loose. I think the deficits are ultimately a real problem, and I think that this is a way to hedge the risk of something not so good happening.
WAPNER: You think the chances are high of something good not happening?
EINHORN: Well, I think it’s a question of when. And, when, we don’t know. But in terms of the idea that the fiscal situation is not sustainable and the monetary policy is low in order to support the fiscal situation, I think these are self-evident, and it’s clear to me that this is just a math thing, and so because — knowing when this is, I don’t know, because it’s a reflexivity. As long as the market is confident in what’s going on, everything is fine. But the minute that that changes, then — then there’s a real problem.
WAPNER: So, lastly, let’s talk about rates real quick and what you think the Fed’s going to do. How many times are they going to cut this year?
EINHORN: I think fewer than are priced in right now.
WAPNER: So, fewer than three?
EINHORN: Sure.
WAPNER: Do you think they cut — do you think there’s a chance they don’t do anything?
EINHORN: There’s a chance. I think re — inflation is re-accelerating. I think there’s a lot of indication of that.
WAPNER: So you think there’s a chance they could do nothing? You think there’s a chance they hike?
EINHORN: Seems unlikely. I don’t think they’re going to want to do that before the election. They seem very politically motivated to — to try to keep the president in — in power.
WAPNER: It’s a rare opportunity to sit down with you. I appreciate your time very much. Thanks for being with us.
EINHORN: Sure. Thank you, Scott.
WAPNER: All right. That’s Greenlight’s David Einhorn exclusively here at the Sohn Conference. Tyler, I will send it back to you.
