David Einhorn, president of Greenlight Capital, spoke with Bloomberg Television’s Stephanie Ruhle and Erik Schatzker today about technology stocks, investment strategy, Federal Reserve policy, and activist investing and high-frequency trading.
On a March 26 dinner conversation with Bernanke, Einhorn said: “I got to ask him all these questions that had been on my mind for a very long period of time, right? And then on the other side, it was like sort of frightening because the answers weren’t any better than I thought that they might be. I asked several things. He started out by explaining that he was 100 percent sure that there’s not going to be hyper inflation. And not that I think that there’s going to be hyper inflation, but it’s like how do you get to 100 percent certainty of anything?”
Einhorn said he was keeping an “open mind” about new Fed Chair Janet Yellen. “I would love to see if she had a better reason for rates to remain at zero at this stage of the economy.”
*TECH IS A SMALLER BUBBLE; MASSIVELY LONG TECH
*VALUATION FOR SOME COMPANIES GOTTEN OUT OF CONTROL
*THIS YEAR ENVIRONMENT TURNED FOR TECH STOCKS
*RECENT TECH IPOS SHOW GETTING END OF CYCLE
*CITES KING DIGITAL, VEEVA IPOS AS SIGN OF TURN
*CENTRAL BANKERS SHOULDN’T SET POLICY FOR MACRO TRADERS
*BEEN CRITICAL OF BERNANKE FOR LONG TIME; FRIGHTENING ANSWERS AT DINNER
*KEEPING OPEN MIND ABOUT JANET YELLEN
*FINDS BERNANKE ASSURANCE LACKING ON HYPERINFLATION RISK
*GREENLIGHT TRADER GUTKIN HELPED NETWORK FOR IEX
*SAID WOULDN’T CALL STOCK MARKET RIGGED
STEPHANIE RUHLE: We’re going to get right to our second big exclusive guest this morning. We are shifting from telecom to hedge funds. David Einhorn is here. He runs the $10 billion long-short fund Greenlight Capital, and he made headlines recently by declaring the tech sector to be in a bubble. So we need to clarify that because as usual, the media never seems to get it right David, now do we?
DAVID EINHORN: Well, I don’t know. We’ve written — we wrote in the letter that there’s — that we thought there’s another tech bubble, but we said it was an echo bubble. And I’d like to emphasize the echo, meaning it’s a smaller bubble. It’s not contained with all tech. We’re actually massively long tech. We’re — our biggest position is Apple Inc. (NASDAQ:AAPL) and then Micron Technology, Inc. (NASDAQ:MU) and Marvel (ph), but we think that there’s a sub-segment of tech which is high momentum stocks that have gotten completely out of control in terms of their valuation, and we think that those stocks actually did reach sort of a bubble proportion.
RUHLE: And they’ve gotten out of control why, because everyone’s just rushing to be in the tech sector and buying anything that they’ve got (ph)?
EINHORN: Well it’s a combination. These are mostly very good businesses, but there’s a difference between what the right price for a very good business is and where some of these stocks have gotten. And this is what happens in bubbles and what happens in momentum. If you have good news and it’s a penny or a percent better than you thought it was and then the stock has to gap up 15 percent higher in response to that, and you do that four or five or six quarters in a row, before you know it the stock has doubled or tripled but the results might only be 5 percent better than you thought that they were and the valuations got out of control.
ERIK SCHATZKER: Valuations out of control. David, you wrote in your letter to investors for the first quarter that you see some of these stocks dropping by 90 percent. So good businesses that are overvalued by that much?
EINHORN: Well let me clarify it. What I was saying was is in the previous bubble back in 1999-2000, even the best stocks fell —
SCHATZKER: Right, like Amazon.com, Inc. (NASDAQ:AMZN) for example or Cisco Systems, Inc. (NASDAQ:CSCO), right?
EINHORN: And those were the best ones. The worst ones fell even more than that. Some of them practically went out of business, right? And what I’m saying is when these stocks become disconnected, they’re very difficult to short because when they’re at a price that’s a silly price they can just keep going. And so twice a silly price is not twice as silly.
SCHATZKER: And some of them are recent IPOs where the float is tiny, right?
EINHORN: Well that too, but it doesn’t matter because it can be a very big company or it can be a small company. But twice a silly price is not twice as silly. It’s still just silly. And so once these things disconnect and then they decide to come back the other way and people say, all right, I’m a grown investor. What would I be willing to pay for this? But I’m disciplined, so I have to look at the multiples now. And now you start looking at the multiples. There’s a really long way for these stocks to fall. And then where a value investor gets interested it’s — it’s even less (inaudible).
SCHATZKER: Which multiples matter to you the most?
EINHORN: Well for simplicity, just cal it PE for now.
SCHATZKER: Well some of them don’t have E.
EINHORN: (Inaudible) that’s a problem because some of these businesses, not only don’t they have earnings, they don’t really have serious plans to make earnings in the future.
SCHATZKER: I look — I ran a — because I know you do this kind of thing. Now my attempt at it is far less sophisticated and comprehensive than yours, but I looked at stocks with a billion dollars of market cap trading at 10 times price to sales and that are traded here in the United States. There’s 89 of them, and the first nine that come up don’t have any earnings at all and aren’t expected to have any earnings in the next 12 months. And we’re talking about stocks trading at as many — as much as 2,900 times sales.
EINHORN: Wow. That’s a lot.
SCHATZKER: Yeah. Now 89, and that doesn’t even include the one that I know you’ve shorted, Athena Health.
EINHORN: Right. Right. No. Look, I don’t think we have a generalized stock market bubble, but I do think we have a certain number of stocks that have caught everybody’s fancy, attention. There’s good stories behind a lot of these stocks and these companies, but the valuations I think have just gotten out of control.
SCHATZKER: So what’s in — you’ve taken a different approach than perhaps the conventional route, which would be pinpointing, identifying overvalued single-name stocks and shorting them and instead gone for a basket approach. What’s in the basket?
EINHORN: Well, a whole number of stocks. Probably many of the ones on your list. We identified one yesterday as an example. I don’t really want to get into all the different ones that are in the basket, but I think it’s — I think people can more or less sort these things out. Certainly we’re not saying like Apple Inc. (NASDAQ:AAPL) is a short or Micron Technology, Inc. (NASDAQ:MU) is a short. We’re long those