David Einhorn: Growth Has Knocked The Stuffing Out Of Value Last Three Years (106% vs. 17%)

Johnny HopkinsDavid EinhornLeave a Comment

In David Einhorn’s most recent investor letter (Q4 2019) he highlights the fact that Greenlight Capital Funds have returned 13.8% in 2019 compared to 31.5% for the S&P 500. He also discusses the significant outperformance of growth stocks vs value stocks over the past three years, saying:

We tend to take comfort in low multiples and we are generally skeptical of high multiples —a framework that is a hallmark of a disciplined value orientation. Until recent years. value investing has tended to outperform growth investing. But over the last three years, growth has knocked the stuffing out of value (106% vs. 17%) — enough so that the long-term outperformance of value stocks has now reversed.

Here’s an excerpt from his letter:

Dear Partner:

The Greenlight Capital funds (the “Partnerships”) returned 13.8% in 2019 compared to 31.5% for the S&P 500 index. Since its inception in May 1996. Greenlight Capital. L.P. has returned 1,592% cumulatively or 12.7% annualized, both net of fees and expenses. Greenlight’s investors have earned $4.5 billion. net of fees and expenses. since inception.

For the year. our long portfolio contributed 37.4%. our short portfolio lost 20.1% and macro added 1.5% to the returns before fees. All told, our longs went up slightly more than the market while our shorts went up slightly less than the market. Even so, the result feels a bit disappointing because at September 30 we seemed on track to have an excellent year. rather than just a decent year.

There was a brief period in September where the environment was favorable for us. WeWork failed in its IPO attempt and subsequently some high-profile money-losing companies saw their share prices cut. Growth stocks in general underperformed. There were musings that value investing was ready to rebound. But that dynamic reversed in the fourth quarter and by year-end growth stocks had out-performed value stocks for the year by 15% (40% vs 25%). In the fourth quarter our longs went up less than the market and our shorts went up more than the market: we underperformed on both sides by similar amounts. Tighter corporate credit spreads drove a small loss in macro during the quarter.

We tend to take comfort in low multiples and we are generally skeptical of high multiples —a framework that is a hallmark of a disciplined value orientation. Until recent years. value investing has tended to outperform growth investing. But over the last three years, growth has knocked the stuffing out of value (106% vs. 17%) — enough so that the long-term outperformance of value stocks has now reversed.

Against this backdrop. many of our longs — including some that contributed positively to 2019s result — are just as cheap today as they were at the beginning of 2019. Likewise, many of our shorts are more expensive today than they were a year ago. The gap between how we perceive the operating business fundamentals of our investments and their market valuations has never been wider.

Thus, we begin 2020 with a portfolio that continues to be concentrated in our best ideas. We currently have 96% of capital in our top 10 longs and 47% of capital in our top 10 shorts.

You can read the entire letter here: Greenlight Capital – Q4 2019 Shareholder Letter.

For more articles like this, check out our recent articles here.

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