Hedge fund manager David Einhorn is telling savvy investors that value investing may be dead and Amazon and Tesla killed it.
"The market remains very challenging for value investing strategies, as growth stocks have continued to outperform value stocks. The persistence of this dynamic leads to questions regarding whether value investing is a viable strategy," Einhorn wrote in an investor letter Tuesday obtained by CNBC.
Value investing, the investment style popularized by billionaire Warren Buffett, has lagged behind its growth counterpart this year.
The performance of U.S. growth stocks has been almost three times better than that of value stocks in the past 10 years. Index fund giant State Street Global Advisors describes the period as “the longest period of underperformance for value since the late 1940s.”
Investors have redeemed $116 billion from U.S. large-cap value funds in the past 10 years, according to Morningstar, and more than one-fourth of that outflow happened in the past 12 months.
Value stocks typically are less expensive than many peers in proportion to their earnings or reported net worth. Fund managers buy them while anticipating long-term appreciation.
Investors have shunned value stocks in favor of companies with rapid earnings or price growth, like Amazon.com, Netflix and Tesla.
For his part, Einhorn specifically cited his bets against soaring Tesla and Amazon shares.
"Given the performance of certain stocks, we wonder if the market has adopted an alternative paradigm for calculating equity value," he wrote.
"What if equity value has nothing to do with current or future profits and instead is derived from a company's 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?" he asked.
"Our view is that just because Amazon can disrupt somebody else's profit stream, it doesn't mean that Amazon earns that profit stream. For the moment, the market doesn't agree," he wrote.
"The knee-jerk instinct is to respond that when a proven strategy is so exceedingly out of favor that its viability is questioned, the cycle must be about to turn around. Unfortunately, we lack such clarity. After years of running into the wind, we are left with no sense stronger than, 'it will turn when it turns.'"
Einhorn also told investors on Tuesday that his Greenlight Capital made three new investments during the third quarter, including a new bet on chip maker Micron Technology Inc., Reuters reported.
Micron had weighed on Greenlight’s performance a few years ago and Greenlight exited the investment late in 2015. In this reunion, the fund bought the stock at $29.21, Einhorn said in his quarterly letter, which was seen by Reuters. The stock now trades at $41.57.
“While DRAM will always be cyclical, we believe investors are underappreciating the dynamics of the current cycle and the long-term structural improvements in the industry,” the letter said.
In the first nine months of 2017, Greenlight gained 3.3 percent, trailing the S&P 500’s 14.3 percent climb. Einhorn, who cemented his reputation by successfully picking undervalued stocks, wrote that the value investing strategy is challenging in the current market climate.
Greenlight also made new bets on premium mattress maker Tempur Sealy International, buying the stock at an average price of $56.11. The company’s stock price tumbled earlier this year when it stopped selling through retailer Mattress Firm, a move Greenlight said may help the company because Mattress Firm was able to negotiate large discounts.
Greenlight analysts forecast that earnings could climb past $6 per share by 2019-2020, beating consensus expectations for $4.05 in 2019.
It also made a new bet on Hewlett Packard Enterprise at an average price of $13.29 a share and said it expects earnings could come in between $1.40 and $1.70 a share in the next years.
(Newsmax wire services contributed to this report).
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