- David Einhorn pointed out high stock-market valuations at CNBC's Delivering Alpha conference.
- Einhorn said he's not bearish, but there will likely be better entry points into the market.
- He also said he's betting on Peloton and CNH Industrials through his hedge fund.
Add David Einhorn to the list of top Wall Streeters pointing out how expensive the stock market is.
At CNBC's Delivering Alpha conference last week, the billionaire founder of the hedge fund Greenlight Capital said it's probably not the best time to buy into the broader market. It's not that long-term, buy-and-hold investors are likely to have lost money decades from now — stocks tend to go up indiscriminately over long durations. But with how high valuations are, forward returns will be lower than they'd be for those who buy in at cheaper levels.
"This is a really, really, really pricey environment, but it doesn't necessarily make me bearish. Asset prices can trade at the wrong price, and they can trade at the wrong price for a long period of time," Einhorn said. "I just observe that it's a really expensive market that if you buy and hold for a very long period of time, I doubt that this is a great — you'll look back and say this was a great entry point of all of the entry points that you could have."
The commonly cited Shiller cyclically adjusted price-to-earnings ratio is at 38 times earnings, one of the highest levels in the last century. Einhorn called this "the most expensive market of all time, as far as I can see, at least since I've been managing."
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According to Bank of America data, valuations explain 83% of the S&P 500's 10-year returns. The bank said in a recent note that current valuations imply 1-2% annualized returns for the index over the next decade, excluding dividends.
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Einhorn is one of many to highlight stock valuations as a factor likely to impact forward returns. Goldman Sachs' David Kostin said in October that the S&P 500 would return 3% annually over the next 10 years. Research Affiliates' Rob Arnott has said the current environment reminds him of the dot-com bubble peak in 2000. Nelson Peltz, cofounder of the asset management firm Trian Partners, also said at Delivering Alpha that stock prices and valuations eventually have to come back down.
Underneath the index level, Einhorn talked about a couple of positions his fund is betting on: Peloton (PTON), the exercise company, and CNH Industrials (CNH), which produces farm equipment.
Shares of Peloton have endured a rough patch after their pandemic-era rally, down 95% from the December 2020 peak. While the firm has a loyal subscriber base of 3 million, Einhorn said it has to cut costs to improve its profit margins.
"They had a corporate policy of paying everybody at the 90th percentile for the jobs they were doing. So they can just fix that and bring the margins to maybe more of a normal level — and you can look at other subscription-type of businesses — and if you do that, the profits on the current gross profit stream could easily be twice what they're forecasting for next year, so maybe it takes them a couple years," he said.
For CNH, Einhorn said that the stock is trading at very depressed levels, and is likely to make a cyclical comeback in the next few years.
"You had a period where you had a bit of a boom in agricultural equipment purchases, and now that's turned into a cyclical bust. AG prices are lower than they were, so farmers are cutting back a little bit on a global basis," Einhorn said.
He continued: "And these things come, and they go, and the equipment eventually ages, and the equipment needs to be replaced. So this year, the AG equipment universe is probably 20% below its average demand over a cycle, and sometime three or four years from now, it will probably be 20% above. That's just the nature of how these businesses work."
Einhorn said the stock, a midsize position in his portfolio, could surge 100% over the next two years.