David Einhorn on his winning short 'bubble basket' strategy that he's continuing

Published Wed, Mar 1 20231:15 PM EST

Jesse Pound @/in/jesse-pound @jesserpound

Hedge fund manager David Einhorn said Wednesday that he is continuing his bets against "bubble baskets" of stocks that helped Greenlight Capital rebound in 2022. In his annual letter released last month, Einhorn defined a bubble stock as one that "could fall at least 80% and still not appear cheap to us." The letter said the fund enjoyed a 30% return from its short positions last year, part of a total gross return of 42.3% for Greenlight. The fund's net return was 36.6% . Einhorn told CNBC on " Halftime Report " on Wednesday that the firm is still betting against some of those stocks. Greenlight identified its newest "bubble basket" of 31 stocks in 2022, and those companies "tend to be profitless, tech-type companies that trade at values based on future hopes," Einhorn said. The fund manager pointed to the use of stock-based compensation as one red flag for these companies, echoing statements from fellow investor Jim Chanos . "A lot of times the companies don't count their stock compensation as an expense, whereas the investors in the company suffer the dilution every year from that. And then if they take their cash and use it to repurchase stock, it's difficult to understand how that is not an expense," Einhorn said. Another one of Einhorn's short baskets is based on an active fund of "innovation" stocks , which fits the description of Cathie Wood's Ark Innovation ETF (ARKK). That short position, which Greenlight created in 2021, at one point accounted for 9% weight of the firm's capital and has delivered positive returns of more than 6%, according to the letter. The fund manager said Greenlight is still betting against that basket of stocks, though at a smaller weight. Einhorn declined to comment on Wood specifically, though he did say that said many investors have "lost focus" on traditional valuation metrics, like discounted future earnings. "I think most people in the market right now cannot do valuation, they choose not to do valuation, or structurally they're valuation agnostic," Einhorn said. The Ark Innovation ETF fell more than 60% in 2022, though the fund has gained more than 20% in the opening weeks of 2023. Einhorn is cautious about the market more generally in 2023, telling CNBC that investors should be " bearish on stocks and bullish on inflation." To be sure, Einhorn's bubble basket strategy does not have a perfect track record. Einhorn acknowledged in the letter that his fund previously made a "mistake" by doubling down on some bets that had not yet paid off, leading to poor performance from 2017-2019 for the strategy. Greenlight's individual short positions were not disclosed in the letter or in the interview.