Don't be fooled by companies beating estimates

Hedge-fund manager David Einhorn cautioned against betting on the extension of a U.S. stock- market rally that he said was fueled by conditions that are difficult to sustain. The Standard & Poor's 500 Index surged 30% last year. The rally strengthened in the fourth quarter as 74% of companies beat analysts' estimates during the earnings season that ended in November. The equity benchmark is little changed this year after recovering from January declines. “In 2013, the market rewarded many companies for beating earnings after they had lowered guidance,” Mr. Einhorn said Wednesday during a conference call discussing results at Greenlight Capital Re Ltd., the Cayman Islands-based reinsurer where he is chairman. “This trend is not likely to continue indefinitely.” Mr. Einhorn, best known for betting on a decline in Lehman Brothers Holdings Inc. before the bank collapsed in 2008, oversees investments for the reinsurer and runs the hedge-fund firm Greenlight Capital Inc. His strategy is to bet both on gains and drops in stocks. He said the reinsurer benefited from holdings in Apple Inc. and Micron Technology Inc. It was hurt by wagers that Chipotle Mexican Grill Inc. and U.S. Steel Corp. would fall. The burrito chain gained 24% in the last three months of 2013, while the steelmaker climbed 43%. “The market ended the year on a strong note after a huge move that was supported mostly by multiple expansion as earnings growth was lackluster,” Mr. Einhorn said. The S&P 500 trades at 17 times reported operating earnings, near the highest level since 2010, according to data compiled by Bloomberg. The ratio increased about 20% in 2013, the biggest jump in four years, while corporate profits rose 5.6%. Greenlight Re said Tuesday that it posted $83.9 million in net income in the fourth quarter, compared with a loss of $60.6 million a year earlier. The improvement was driven by better investment results and profit in its underwriting operations. Reinsurers earn premiums by helping insurance companies shoulder risk. Those funds are invested to back obligations and generate profit. Mr. Einhorn said Oct. 31, after reporting third-quarter results, that he was taking a more conservative approach to stocks following their really earlier in the year. That same day, Laszlo Birinyi, president of Birinyi Associates Inc., said the S&P 500 would reach 1,820 by this month, up from about 1,763 on Oct. 30. The benchmark climbed to about 1,845 on Wednesday. (Bloomberg News)