In his latest Q1 2024 Letter, David Einhorn says he excited about today’s opportunity set in what he calls a ‘broken’ market. Einhorn explains that the reasons the market is broken is due to:
- Investors do not care about valuation (passive index funds);
- Investors cannot figure out valuation (most retail investors who have no formal valuation training); or
- Choose not to care about valuation (various technical strategies, quant strategies, and any trading strategy with short-term holding periods, which by definition expresses an opinion about price, but not value).
Here’s an excerpt from the letter:
As several trillion dollars have been redeployed in this fashion in recent years, it has fundamentally broken the market. There are significant policy, macroeconomic, capital formation and corporate governance implications of all this and many of them are negative.
But, from our perspective, the result of this historic shifting of capital is a beautiful opportunity set in which we can invest. We are not complaining. In fact, we are excited!
Once these undervalued stocks underperform long enough, some of them become ridiculously cheap. Instead of us paying 10-15x earnings to acquire our position, we might only have to pay 5-8x earnings.
If we do that in companies that don’t have a lot of debt and can return a good chunk of their earnings to us in buybacks and dividends, our current return is extremely attractive and our perceived level of risk is low.
If we are getting a double-digit return from dividends or buybacks, it doesn’t matter if other investors continue to ignore the stock. Our return can come from the company itself, rather than from other investors. Even if the market stays “broken” in these names, we still expect to do well.
We believe we are finding compelling investments in this market with return profiles that historically we have only seen at the bottom of a bear market! We give several examples below of our new positions that exemplify this opportunity set.
You can read the entire letter here:
David Einhorn – Greenlight Capital Letter Q1 2024
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