Greenlight Capital’s David Einhorn.Reuters
Stock market valuations have become divorced from reality as the likelihood of tax policy changes to drive company earnings has slipped, according to David Einhorn's Greenlight Capital.
"The bulls explain that traditional valuation metrics no longer apply to certain stocks," the New York-based firm wrote in a letter to clients Tuesday that was seen by Bloomberg News. "Perhaps as the prospects for tax reform have dimmed, the market has regained enthusiasm for profitless companies that aren't at risk of paying taxes."
Mr. Einhorn has warned previously of inflated equity prices caused by central bank easing but the firm said earlier this year that tax reforms pushed by President Donald Trump could be a boon for economic growth and favorably affect some positions. The latest letter revived the more cynical outlook.
The firm's hedge funds rose 1.3 percent in the first quarter, Greenlight said in the letter, lagging a 6.1-per-cent gain in the S&P 500 Index, including reinvested dividends. Short bets, particularly against Tesla Inc. and a group of technology stocks that Einhorn has described as the "bubble basket," detracted from profits generated by wagers on Apple Inc., Chemours Co. and gold.
"The basket is sized appropriately with the understanding that twice a silly price isn't twice as silly," the hedge fund said. "In due time, we expect these bubbles to pop."
Greenlight added shares of Perrigo Co. after the drugmaker made several large guidance cuts and a new management team set more achievable earnings targets, according to the letter. The hedge fund, which purchased a stake at the average price of $68.81 per share, said Perrigo's core U.S. over-the-counter business should continue to grow profits. Perrigo shares retraced losses after the letter's publication, rising 1 per cent Tuesday to $67.72 at 1:40 p.m. in New York trading.
Greenlight also took new positions in Conduent Inc., a transaction and back-office processing company, and an unnamed European financial institution. It exited three short wagers against Canadian banks as well as bets against manufacturer LyondellBasell Industries NV and oilfield services company RPC Inc. at losses. Greenlight closed a short against Signet Jewelers Ltd. for a profit.
His letter did not specify which Canadian banks it exited, but he said they were closed "at a loss as the oil and gas credit loss thesis didn't sufficiently materialize."
The firm's largest disclosed long positions at the end of the first quarter were AerCap Holdings NV, Bayer AG, Consol Energy Inc., General Motors Co. and gold.
As for when stock values might reset, the hedge fund didn't forecast the timing.
"There was no catalyst that we know of that burst the dot-com bubble in March 2000, and we don't have a particular catalyst in mind here," the firm said in the letter. "That said, the top will be the top, and it's hard to predict when it will happen."
With a file from The Globe and Mail