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Are tech stocks in an ‘enormous’ bubble? Greenlight’s David Einhorn thinks so

October 28, 2020, 9:49 AM UTC

Investor David Einhorn said technology stocks are in an “enormous” bubble and he has added a set of short wagers to profit from it.

“The question at hand is where are we in the psychology of this bubble?” the head of hedge fund Greenlight Capital wrote in an Oct. 27 note, seen by Bloomberg. “Our working hypothesis, which might be disproven, is that September 2, 2020 was the top and the bubble has already popped. If so, investor sentiment is in the process of shifting from greed to complacency.”

Tech stocks have driven the market’s rally this year. The Nasdaq 100 Index is up 33% since Jan. 1, led by gains in Zoom Video Communications Inc. and Tesla Inc. By contrast, the S&P 500 has risen 5.3%.

As signs of a bubble, Einhorn points to a mania in IPOs, a huge market concentration in a small group of stocks or a single sector, extraordinary valuations and “incredible” trading volumes in speculative instruments.

As a result, Greenlight has adjusted the portfolio of companies its wagering against by adding a fresh so-called bubble basket of mostly “second-tier companies and recent IPOs trading at remarkable valuations,” he wrote. Einhorn has long held what he calls a bubble basket of short wagers which have included tech giants such as Inc. and Netflix Inc.

A spokesman for the firm declined to comment.

This isn’t the first time Einhorn has flagged a tech bubble. In early 2016, he “prematurely identified what we thought was a bubble,” he wrote in the letter.

It’s been a difficult road for Greenlight recently. The fund is down 16.1% through September, and has been trying to recoup losses that began in 2015. As of Jan. 1, the firm managed $2.6 billion, down from a peak of $12 billion.

Read more: Einhorn Hedge Funds Gained 1.1%, Helped by Homebuilder Rally

Other highlights from the letter:

  • The coming election may rank “among the most perilous times, absent war, in modern American history.” A “tempest” of troubles related to the Covid pandemic — including inequities, violence and calls for social change — could explode after the election, no matter which side wins.
  • The fund started “medium-sized” long positions in information technology company Synnex Corp., Austrian sensor maker AMS AG, and ATM-manufacturer NCR Corp.
  • While a few Greenlight employees are working from the firm’s New York offices, which have been open since late summer, most of the staff continues to work from home, he said.