David Einhorn 2005 Interview On Activism; Allied Capital ShortVW Staff
In the pas weeks, David Einhorn had been all over the news. We covered the news, but thought some of his old speeches/ideas before he was super famous would be of interest to readers. We found some material from 2007/08. If you have anything earlier we would LOVE to see it send us a tip (thank you to a reader for sending this one to us). Here is a speech Einhorn made in 2006. We will be posting more. sign up for our free newsletter to ensure you do not miss any.
David Einhorn 2005 Speech: Big Misunderstandings
Greenlight Capital’s David Einhorn explains how to look for market mispricings, what situations drive Greenlight to activism, and what he thinks the market is missing in Freescale Semiconductor, M.D.C. Holdings, Inc. (NYSE:MDC), Allied Capital, France’s Renault and Germany’s Lanxess.
You’ve said your investing style differs somewhat from that of traditional value investors. How so?
David Einhorn: We take the traditional value investor’s process and just flip it around a little bit. The traditional value investor asks “Is this cheap?” and then “Why is it cheap?” We start by identifying a reason something might be mispriced, and then if we find a reason why something is likely mispriced, then we make a determination whether it’s cheap.
Explain the distinction.
David Einhorn: If you’re looking for something that’s cheap, you’ll probably do a variety of screens – on price-to-sales, price-to-earnings, price-to-book, whatever – to identify stocks that appear to be inexpensive. Once you have that list, then you start to research if there are good reasons the stocks deserve to be cheap, or if maybe there’s an investment opportunity because they’re cheap without a good reason. We think that’s the way most value investors approach it.
We never do screens like that. We start by identifying situations in which there is a reason why something might be misunderstood or mispriced, why it’s likely investors will not have correctly figured out what’s going on. Then we do the more traditional work to confirm whether, in fact, there’s an attractive investment to make.
So you’re often looking for special situations – a spin-off, or a post-bankruptcy, say, where mispricings can be common?
David Einhorn: Basically, yes. It happens routinely [in such situations] that the historical performance of a company doesn’t give a particularly good view of what the prospective performance of the business is likely to be. It may be due to how the performance had been reported when a now-independent business was part of a larger company. It may be that strategies or capabilities have changed in ways that aren’t immediately apparent.
We also find opportunities when there is a large upheaval or rejection of a particular company – or sometimes an entire industry – for reasons that are obviously just plain old cyclical or otherwise based on what the investment fashion of the moment is.
An example: Investors in retail companies are very focused on monthly comparable-store sales, particularly during the holiday season. It seems like at least every other year, particularly in January, we’re able to find a retailer that we really like that had negative comparable-store sales during Christmas and the stock trades down to seven or eight times earnings. The company has a clean balance sheet and it’s a nice ongoing franchise. We have no idea how the next Christmas will go, but if it goes okay, the earnings will be higher and we will then get a much better multiple on those earnings. We’ve been through that before with Circuit City and Foot Locker.
You tend to make a few very big investment bets, why?
David Einhorn: We believe in constructing the portfolio so that we put our biggest amount of money in our highest-conviction idea, and then we view the other ideas relative to that. We find things that we think are exceptional only occasionally. So if we find something that is really set up, where we think it’s mispriced, where we have a good understanding of why it’s mispriced, where we think the mispricing is very large and the overall risk is very small, we take an outsized position to make sure we give ourselves the chance to be well compensated for getting it right.
You’ve also developed a reputation as somewhat of an activist investor. Is that part of your strategy?
David Einhorn: Activism for us is Plan B. In cases where we’ve been activists, we’ve generally been passive investors for a good period of time first. But while it isn’t our goal, when something goes seriously awry, we won’t hesitate to try to effect change when we feel it better protects the interest of the partnership than exiting.
See full David Einhorn 2005 Speech: Big Misunderstandings full interview