WHEN: TODAY, Wednesday, October 25, 2017
WHERE: CNBC's "Closing Bell"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Greenlight Capital President & Founder David Einhorn and CNBC's Leslie Picker on CNBC's "Closing Bell" (M-F 3PM-5PM) today, Wednesday, October 25th.
Following is a link to video of the interview on CNBC.com: https://www.cnbc.com/video/2017/10/25/david-einhorn-value-investing-is-due-for-a-significant-recovery.html.
All references must be sourced to CNBC.
SARA EISEN: ALL RIGHT BOB, THANK YOU. GREENLIGHT CAPITAL'S DAVID EINHORN RETHINKING HIS INVESTMENT STRATEGY PERHAPS. IN AN INVESTOR LETTER EINHORN WRITING WHAT IF EQUITY VALUE HAS NOTHING TO DO WITH CURRENT OR FUTURE PROFITS AND INSTEAD IS DERIVED FROM A COMPANYS ABILITY TO BE DISRUPTIVE TO PROVIDE SOCIAL CHANGE OR TO ADVANCE NEW BENEFICIAL TECHNOLOGIES, EVEN WHEN DOING SO, RESULTS IN CURRENT AND FUTURE ECONOMIC LOSS DAVID EINHORN JOINS US NOW EXCLUSIVELY WITH OUR VERY OWN LESLIE PICKER, LESLIE IT'S ALL YOURS.
LESLIE PICKER: THANK YOU SARA DAVID, I WANT TO START RIGHT AT THE HEART OF THIS LETTER HERE. ARE YOU SAYING THAT VALUE INVESTING NO LONGER WORKS IN THESE MARKETS?
DAVID EINHORN: I'M ACTUALLY SAYING THE EXACT OPPOSITE OF THE WAY THE LETTER IS BEING INTERPRETED THE LETTER IS ACTUALLY A DEFENSE OF VALUE INVESTING. WHAT WERE SAYING IS IS THAT THE VALUE OF A COMPANY HAS TO DO WITH THE CURRENT AND FUTURE PROFITS DISCOUNTED BACK AT AN APPROPRIATE RATE AND THEN WTIH A TONE OF IRONY, WE ARE SAYING HYPOTHETICALLY WHAT WOULD IT TAKE FOR THAT THEORY TO BE WRONG AND ADVANCING THE WAY THAT WE THINK SOME INVESTORS ARE INVESTING TODAY AND WE THINK ULTIMATELY THIS IS A TEMPORARY PHENOMENON TIME TO TIME WHEN VALUE INVESTING GETS OUT OF FOCUS, PEOPLE QUESTION, HEY, IS THIS EVER GOING TO WORK AGAIN THE LAST TIME IT HAPPENED WAS AROUND 1999 WHEN EVERYBODY WAS TALKING ABOUT EYEBALLS ITS LIKE THE NEW PARADIGM FOR INVESTING. AND THAT DIDNT END VERY WELL. I THINK RIGHT NOW WE'RE SEEING SIMILAR INVESTORS QUESTIONING THE VIABILITY OF VALUE INVESTING, AND THEYRE LOOKING AT OTHER POSSIBLE WAYS TO EXPLAIN THE STRANGE BEHAVIOR OF CERTAIN STOCKS I THINK OVER TIME, THIS IS GOING TO REVERT AND VALUE INVESTING WHICH HISTORICALLY HAS BEEN A TERRIFIC STRATEGY IS DUE AT SOME POINT FOR A SIGNIFICANT RECOVERY.
PICKER: SO YOU SAY IT'S A TEMPORARY PHENOMENON, DO YOU HAVE ANY SENSE ON WHAT COULD SHIFT IT MORE TOWARDS TRADITIONAL VALUE? INVESTORS MARKET A TRADITIONAL VALUE INVESTORS MARKET. WHAT AND WHEN COULD CHANGE THE PHENOMENON YOURE SEEING TODAY?
EINHORN: NO I DON'T KNOW THE ANSWER TO THAT I DON'T KNOW WHAT WILL CHANGE IT I DON'T KNOW WHEN WELL CHANGE IT I LOOK BACK TO MARCH OF 2000 WHEN THE NASDAQ BUBBLED UP AT THE TOP AND THERE WAS NO PARTICULAR REASON I CAN SEE WHY IT HAD THE TOP RIGHT THEN, WHY IT HAD TO REVERSE, WHAT HAD TO CHANGE I KNOW THE TONE OF THE MARKET CHANGES IT CHANGES FROM TIME TO TIME, IT DOES IT WITHOUT WARNING, ITS NOT PARTICULARLY PREDICTABLE BUT OVER LONG PERIOD OF TIMES HISTORICALLY, VALUE DOES TEND TO WIN OUT, AND AFTER A LONG PERIOD WHERE IT HAS -- IT HAS BEEN A CHALLENGE FOR VALUE INVESTORS, I THINK IT'S ACTUALLY PROBABLY PRETTY GOOD TIME TO BE INVOLVED IN THAT STRATEGY.
PICKER: IN RECENT LETTERS, YOU HIGHLIGHTED THIS BUBBLE BASKET OF SHORTS, AMAZON, NETFLIX, TESLA JUST TO NAME A FEW HOW BIG IS THIS BASKET OF SHORTS AND HOW HAS THE SIZE OF THAT CHANGED OVER TIME.
EINHORN: WE PUT THE BUBBLE BASKET IN PLACE IN ABOUT 2014 FOR THE FIRST THREE YEARS, 2014, 15, AND 16, WE BASICALLY BROKE EVEN ON IT. WE HAVE LOSSES IN THE BUBBLE BASKET IT'S NOT PARTICULARLY LARGE. I THINK IT GETS A DISPROPORTIONATE AMOUNT OF ATTENTION BECAUSE I LIKE TO WRITE ABOUT IT I FIND THESE COMPANIES AND THE BEHAVIORS AND STOCKS RELATING TO THEM TO BE VERY, VERY PECULIAR AND SO ITS KIND OF FUN TO TALK A LOT ABOUT IT, BUT IT'S A MUCH BIGGER PART WHAT IVE BEEN SPEAKING ABOUT BECAUSE I THINK IT'S INTERESTING TO PEOPLE, PEOPLE KNOW THESE COMPANIES, AND THEYRE INTERESTED IN WHAT GOES ON WITH THEM COMPARED TO THE RELATIVE IMPORTANCE THAT THEY HAVE WITHIN MY PORTFOLIO IN TERMS OF HOW MUCH CAPITAL I HAVE BACKING BEHIND THESE POSITIONS.
PICKER: AND I LIKE WHAT YOU SAID ABOUT AMAZON IN YOUR LETTER FROM THE THIRD QUARTER, YOU SAY JUST BECAUSE AMAZON CAN DISRUPT SOMEBODY ELSES PROFIT STREAM, IT DOESNT MEAN THAT AMAZON EARNS THAT PROFIT STREAM IS THAT SOMETHING THAT'S FUNDAMENTALLY WRONG WITH AMAZONS BUSINESS MODEL WITH A LOT OF THESE BUBBLE STOCKS OR AS YOU CALL THEM BUBBLE BASKET OF BUBBLE SHORTS? IS IT WRONG WITH THEIR BUSINESS MODEL THESE DAYS.
EINHORN: I THINK IT'S A FUNDAMENTAL MISTAKE THAT INVESTORS MAKE. I THINK THERES A VIEW AT THE MOMENT THAT IF YOU CAN DISRUPT SOMEBODY ELSES PROFITS, YOURE ENTITLED TO THOSE PROFITS. AND SO THEREFORE YOURE VALUABLE BUT I THINK THE BIGGER QUESTION IS IS, WHERE ARE YOUR PROFITS? AND IF YOURE GOING TO VALUE A COMPANY BASED ON THEIR PROFIT, SOONER OR LATER, THEY HAVE TO ACTUALLY EXIST AND THEY HAVE TO EXIST IN SIZE AND IF YOU LOOK AT THE VALUE OF THESE COMPANIES, ITS ASSUMING REALLY REALLY LARGE PROFITS IN THE FUTURE, AND ITS HARD TO SEE WHERE THEY COME FROM THE TRUTH IS SOMETIMES WHEN YOU COMPETE AWAY THE PROFITS WITHIN AN INDUSTRY, THOSE PROFITS ARE JUST GONE. AND AMAZON MIGHT BE JUST A GREAT EXAMPLE OF TRANSFERRING PROFITS FROM CORPORATE AMERICA BACK TO THE CONSUMER AND THAT MIGHT BE SOCIALLY GOOD, BUT IM NOT SURE WHY THAT'S PARTICULARLY VALUABLE TO AMAZON SHAREHOLDERS.
PICKER: AND OF COURSE, UBER HAS THAT SAME MANTRA, UBER, AMAZON HAVE JUST ECONOMIES OF SCALE GROWING, LOOKING AT THE MARKET AS A ZERO SUM GAME. BUT, EITHER WAY, YOUR PERFORMANCE DOES SEEM TO BE TURNING AROUND, YOU KNOW, BEATING THE S&P 500 DURING THE QUARTER, WHAT DO YOU ATTRIBUTE THAT TO AND WHAT DOES THAT TELL YOU ABOUT YOUR OUTLOOK FOR YOUR PERFORMANCE FOR THE REST OF THE YEAR
EINHORN: YEAH, ITS VERY HARD TO FIGURE OUT WHAT OUR PERFORMANCE IS GOING TO BE ON A MONTH TO MONTH BASIS, BUT THINGS DEFINITELY DID IMPROVE FOR US IN THE LATTER PART OF THE QUARTER THE IMPROVEMENT SEEMS TO BE CONTINUING INTO OCTOBER WHICH WAS WEEKS AGO SEEMS TO BE A PRETTY GOOD MONTH FOR US AND WERE HOPEFUL THAT WERE GOING TO CONTINUE PERFORMING ITS BEEN A DECENT YEAR FOR OUR LONG PORTFOLIO WHICH I THINK HAS OUTPERFORMED THE MARKET BY A LITTLE AND ITS BEEN AN OKAY YEAR FOR THE SHORT PORTFOLIO WHICH IS LOSS MONEY, BUT NOT NEARLY AS MUCH AS THE MARKET AND HOPEFULLY THIS WILL CONTINUE.
PICKER: WHEN YOU LOOK AT THE MARKET THOUGH ON THE SHORT SIDE, DOES IT MAKE YOU WANT TO SIT OUT AND NOT PUT AS MANY SHORT POSITIONS INTO YOUR PORTFOLIO? I MEAN, HOW DO YOU REALLY BE A LONG SHORT EQUITY HEDGE FUND MANAGER IN THIS ENVIRONMENT WHEN IT SEEMS LIKE THE MARKET JUST ONLY KNOWS ONE DIRECTION THESE DAYS EXPECT FOR OF COURSE TODAY.
EINHORN: WELL, LOOK, RIGHT NOW I THINK, I THINK WE'RE IN A MARKET THAT'S RISING. WHEN THE MARKETS RISING, IT'S GOING TO BE HARDER FOR YOUR SHORTS THE PROBLEM IS WE DONT REALLY KNOW WHICH WAY THE MARKET IS GOING. SO WE TRY TO DO AS CONSTRUCTIVE PORTFOLIO BOTH GOOD IDEA OF LONG AND SHORT THAT HAVE FAVORABLE RISK ADJUSTED RETURNS. AND GIVEN THE DYNAMIC WEVE HAD LATELY OF MOMENTUM DOING SO WELL WHICH TENDS TO BE MORE ON OUR SHORTS AND VALUE DOING POORLY. WE THINK WERE DOING PRETTY WELL RELATIVE TO THE ENVIRONMENT THAT WERE IN WE THINK THAT THE VALUATION DISCREPANCIES BETWEEN THE LOANS AND SHORTS IS PARTICULARLY, PARTICULARLY GOOD RIGHT NOW. SO IF WE DO GET A REVERSION IN STYLE OR TONE IN THE MARKET, WE ACTUALLY THINK WERE POSITIONED TO DO RATHER WELL.
PICKER: YOU'VE BEEN RIGHT IN THE PAST IN CALLING THE MAKINGS OF THE FINANCIAL CRISIS, PUTTING ON A SHORT POSITION OF LEHMAN RIGHT BEFORE THAT WENT UNDER. DO YOU SEE ANY SYSTEMIC RISK IN THE MARKET RIGHT NOW? OR ARE YOU LOOKING AT ANYTHING THAT MIGHT CAUSE A POTENTIAL CORRECTION – A POTENTIAL REVERSAL OF WHAT HAVE WE'RE SEEING WITH THE STOCK MARKET THESE DAYS?
EINHORN: I DON'T KNOW. I DON'T LIKE TO MAKE BIG PREDICTIONS ABOUT WHICH WAY THE STOCK MARKET IS GOING. I THINK I READ SOMETHING THE
OTHER DAY WEVE GONE ABOUT THE LONGEST EVER WITHOUT A 3%
CORRECTION WHICH MEANS THERES PROBABLY A FAIR AMOUNT OF OPTIMISM THAT'S BAKED INTO THINGS. BUT, YOU KNOW, IT'S HARD TO KNOW WHAT WILL CHANGE. AND I THINK WE'RE POSITIONED TO DO – AT LEAST OKAY, ALMOST NO MATTER WHAT HAPPENS.
PICKER: ONE COMPANY THAT YOU'VE BEEN TOUTING FOR AWHILE NOW IS CATERPILLAR, THAT SAW A DECENT RISE YESTERDAY ON A NICE EARNINGS BEAT. IS THAT SOMETHING YOU THINK WILL ULTIMATELY PLAY OUT IN YOUR FAVOR? I KNOW OFF SHORT POSITION IN CATERPILLAR.
EINHORN: YEAH. WE'RE NEGATIVE IN CATERPILLAR. WE THINK THEY BUILT A LOT OF INVENTORY AT THEIR COMPANY, WE THINK THEY'VE PUT A LOT OF INVENTORY INTO THE CHANNEL, WE THINK THEY'RE BEGINNING TO HAVE TO HIRE BACK PEOPLE, COMMODITIES ARE MOVING AGAINST THEM AND THEIR END MARKETS ARE BEGINNING TO TURN AGAINST THEM AS WELL. THE COMPANY HAS OUTPERFORMED EXPECTATIONS THIS YEAR, BUT WE THINK THE 2018 IS SHAPING UP TO BE A YEAR OF POTENTIALLY SIZABLE EARNINGS DISAPPOINTMENT FOR THEM.
PICKER: AND TESLA OF COURSE IS ANOTHER SHORT YOU'VE HAD FOR A DECENT AMOUNT OF TIME. AND THAT ONE SEEMS TO BE MOVING MORE TOWARD YOUR FAVOR, DOWN ABOUT 6% IN THE QUARTER. DO YOU THINK THAT WILL CONTINUE OVER THE COURSE OF THE NEXT FEW
MONTHS?
EINHORN: YOU KNOW, IT'S HARD TO PREDICT AGAIN THE PARTICULAR DIRECTION OF A STOCK OVER ANY PARTICULAR PERIOD OF TIME. BUT THE TESLA STORY, YOU KNOW, SEEMS TO BE COMING TOWARDS A HEAD A
LITTLE BIT. THE COMPANY'S UNDER A LOT OF PRESSURE TO PERFORM, TO ACTUALLY MANUFACTURE LARGE NUMBERS OF CARS. I THINK THAT'S ACTUALLY A SKILL. AND I THINK THAT THEY'RE HAVING TROUBLE EXECUTING ON IT. MEANWHILE, I THINK THE DEMAND FOR SOME OF THEIR OLDER CARS WHICH ARE MORE EXPENSIVE, I THINK THE MARKET FOR THAT IS BEGINNING TO SATURATE ITSELF OUT. THERE'S LOTS OF COMPETITION COMING WITHIN ELECTRIC AT ALL DIFFERENT PRICE POINTS WITHIN THE MARKET. AND FINALLY, YOU KNOW, TESLA CUSTOMERS HAVE BENEFITTED FROM GOVERNMENT SUBSIDIES. AND SOME TIME NEXT YEAR THEY'RE GOING TO RUN OUT OF CUSTOMERS THAT ARE ELIGIBLE TO RECEIVE THE SUBSIDY. AND THAT'S GOING TO PUT THEM AT A SIZABLE COMPETITIVE DISADVANTAGE TO THE NEWER ENTRANTS IN ELECTRIC VEHICLES.
PICKER: WILL THAT BENEFIT ONE OF YOUR LONGS GM?
EINHORN: I WOULD HOPE SO. GMS ACTUALLY SELLING HALF AS MANY ELECTRIC CARS TODAY AS TESLA. IT'S SUCH A SMALL PART OF GM BECAUSE THEY SELL ABOUT 9 MILLION CARS A YEAR AND TESLA SELLS ABOUT 100,000 AT THIS POINT.
PICKER: AND THAT'S OF COURSE YOU WANT MORE OF AN ACTIVIST ON EARLIER THIS YEAR. IS THAT A STRATEGY WE CAN EXPECT TO SEE MORE OF FROM YOU IN THE FUTURE?
EINHORN: WE ARE RARELY ACTIVISTS. OUR GENERAL STRATEGY IN BUYING COMPANIES IS TO BUY AND HOLD THEM FOR A GOOD PERIOD OF TIME AND WATCH THEM PLAY OUT. AND THAT'S WHAT PEOPLE SHOULD EXPECT FOR MOST OF OUR INVESTMENTS. WE HELD GM FOR, YOU KNOW, AT LEAST TWO YEARS I THINK, BEFORE WE BECAME ACTIVISTS AND IT WAS ONLY AS A RESULT OF CONVERSATIONS THAT WE HAVE THAT MADE US THINK THIS WAS A WORTHWHILE THING TO DO. YOU KNOW, SINCE WE HAVE THAT SITUATION, WE'VE RESOLVED IT IN TERMS OF, YOU KNOW, THE MARKET HAS DECIDED WHAT TNGS AND THE SHAREHOLDERS DECIDED WHAT THEY THINK. AND NOW WE THINK IT'S JUST UP TO GM TO PERFORM AND EXECUTE ON THEIR BUSINESS PLAN AND THEY SEEM TO BE DOING A GOOD JOB.
PICKER: AND I FOUND IT INTERESTING IN THE QUARTER THAT YOU ADDED POSITIONS IN SOME KIND OF MORE LEGACY TECH COMPANIES. MICRON BEING ONE. THE SEMICONDUCTOR SPACE UNDER A BIT OF PRESSURE TODAY ON SOME WEAKNESS AND AMDs EARNINGS. DOES THAT CONCERN YOU AT ALL FOR THE FUTURE OF THAT SPACE?
EINHORN: I THINK MICRON IS A VERY EXCITING STORY RIGHT NOW. BECAUSE WE'RE GETTING TOWARDS THE END OF HOW MUCH SMALLER YOU CAN MAKE D-RAM. AND SO THE RESULTS OF THAT, IT IS THAT THE COST, THE PRICING
HAS STOPPED FALLING FOR THE PRODUCT AND YET THE DEMAND IS
GROWING. D-RAM USED TO BE ALL ABOUT COMPUTERS, BUT IT'S NOT SO MUCH ANYMORE. IT'S MORE ABOUT CELL PHONES AND
SERVERS, THE KINDS OF THINGS THAT ARE EXCITING FOR THEM AND
TO REQUIRE LOTS AND LOTS OF D-RAM. YET YOU HAVE MICRON TRADING AROUND $40 TODAY. YOU PE OF AROUND FIVE. I THINK THIS IS A PRETTY INTERESTING SITUATION AND WE'RE EXCITED TO BE BACK INVOLVED WITH IT.
PICKER: IS THERE ANYTHING THAT YOU THINK THE MARKET ISNT PRICING IN IN TERMS OF THE POLITICAL ENVIRONMENT OR DIFFERENT TRENDS RELATED TO ACTIVE AND PASSIVE INVESTING? YOU KNOW, ARE THERE CERTAIN THINGS WE SHOULD BE PAYING ATTENTION TO THAT WE'RE NOT RIGHT NOW?
EINHORN: I THINK THE ACTIVE PASSIVE INVESTING IS A CYCLICAL PHENOMENON. WHEN MOMENTUM IS GOING, WHEN VALUE AND GROWTH IS GROWING. INDEX FUNDS TEND TO PERFORM REALLY WELL. BECAUSE THEY HAVE THE BIGGEST WAITING TO THE VALUE OF THE COMPANY THEY'RE THE MOST UNDERWEIGHT WHATEVER THE MOST UNDERVALUED THING IS. SO WHEN YOU HAVE A MARKET LIKE THIS, IT'S HARDER FOR VALUE PEOPLE TO PERFORM RELATIVE TO AN INDEX. AND CAPITAL COMES OUT, PEOPLE SELL THEIR VALUE STOCKS, REDEPLOYED INTO THE MOMENTUM STOCKS AND THIS GOES UNTIL IT DOESN'T GO. AND WE'VE SEEN THIS HAPPEN I THINK THREE OR FOUR TIMES OVER THE COURSE OF MY CAREER. AND WHEN IT REVERTS IT TENDS TO REVERT PRETTY SHARPLY. AND I THINK IT WILL DO SO.
PICKER: WHAT ABOUT THE UNCERTAINTY RELATED TO TAX REFORM? IS THAT SOMETHING THAT YOU'RE LOOKING AT WHEN MODELLING DIFFERENT INVESTMENT OPPORTUNITIES RIGHT NOW?
EINHORN: YEAH. I ACTUALLY THINK TAX REFORM HAS A MUCH BETTER CHANCE OF PASSING THAN THE HEALTH CARE PACKAGE DID. AND I THINK THAT WHAT'S INTERESTING FOR VALUE INVESTING IS COMPANIES UNDER OUR PORTFOLIO – THEY TEND TO BE PROFITABLE. THEY TEND TO PAY TAXES. AND SO LOWER CORPORATE TAX RATE SHOULD REALLY BENEFIT THEM. AND A LOT OF COMPANIES WERE SHORT, THEY DON'T REALLY MAKE ANY MONEY. AND SO IT'S HARDER TO SEE WHY TAX REFORM WILL HELP THEM SO MUCH WE'RE HOPING TAX REFORM WILL PASS AND WE, WE EXPECT THAT WOULD ACTUALLY BE POSITIVE.
PICKER: DAVID EINHORN, FOUNDER OF GREENLIGHT CAPITAL. THANK YOU SO MUCH FOR JOINING US. HOPE YOU COME BACK SOON.
EINHORN: THANKS SO MUCH. BYE LESLIE.
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CNBC
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CNBC
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e: emma.martin@nbcuni.com
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