market folly

Steve Einhorn of Omega Advisors was recently interviewed on The World According to Boyar Podcast.  Einhorn has been Lee Cooperman's longtime partner at the firm, which recently converted into a family office.


Steve Einhorn Interview on Boyar Podcast

-  Omega runs long/short, primarily in the US with average exposure in developed economies.  Would prefer 15% lumpy return than a 8% non-lumpy return.

- They also spend a lot of time on macro thinking and strategy to combine with their equity research.  They assess a number of factors: economic activity, earnings growth, monetary/fiscal policies, valuation, supply and demand, etc.

-  This helps them determine what exposure they want in the portfolio.  If they're constructive overall, they're willing to take more stock specific risk.  They're bottom-up stock pickers, but if a macro outlook leans certain ways, they can look to take more exposure to a certain sector.  They'll also sell options premium in certain instances.

- On position sizing: they first look at liquidity as they don't want to be so large in a name that they can't get out without disturbing the market.  The second is the risk/reward associated with a given name.  A large long for them is 3-5% of assets and large short would be 1-2%.

-  They'll exit a stock if it meets their stock price target and upside is diminished, or if they were simply wrong on their assessment of fundamentals, or if there's another stock in the sector that's more attractive.

-  Currently he likes the tech sector (software) due to rapid growth in revenue and cashflow.  They see moats around many of these names allowing them to keep pricing flexibility.  They think global growth will be less than it has been historically, and in this environment they want to be invested in growth names, as tech names are often independent of the business cycle.  Not to mention, the multiples they're paying is not excessive in their view.

- Another sector they like is industrials as a synchronized global economic expansion will benefit some of these companies.  They like the position in the cycle.  They also like financials, feels they're cheap relative to tangible book and can see high dividend growth.  In the energy sector, oil prices have ramped up, but some of those stocks haven't reflected that.

- They're not interested in utilities or telecom names, anything interest rate sensitive.  Consumer staples is another area that "looks expensive to them on a multiple basis relative to underlying growth prospects."


Steve Einhorn's Bear Market Checklist

Five items are almost always present at the end of a US bull market and the start of a bear market.  The five are:

1)  Problematic inflation:  if wage inflation is around 3.5% it's a problem (it's currently well below that).  Also watch core consumer prices (you'd need to see consumer inflation in excess of 2.25%)

2)  A hostile Federal Reserve:  raising rates well above the neutral rate of 2.5-3% causes a hostile Fed (currently below that).  Thinks they'll gradually lift rates.

3)  Prospect of recession: "virtually nothing we look at shows the economy in the US is prone to a recession anytime soon."

4)  Investor sentiment:  climbing a wall of worry.  Currently doesn't think it's excessive or speculative.

5)  Valuation: When it becomes extended relative to interest rates and inflation.  Current multiples aren't extended in relation to interest rates.  Modestly above long-term average.


- Sees forward equity returns of 7-9%.  "Bull markets don't die of old age, they die because they are murdered by the Federal Reserve.  Our Federal Reserve is not in a murderous mentality given tame inflation and moderate economic growth."


For other recent podcasts, we've also previously highlighted Boyar's interview with Chris Mayer, the author of 100 Baggers.

Embedded below is the podcast audio of Boyar's interview with Steve Einhorn:



Email readers:  Click here to listen

If you missed it, we also posted up complimentary equity research from Boyar on Charter Communications (CHTR), Franklin Resources (BEN), and SunOpta (STKL).