David Einhorn's New Target

The fame hedge fund managers attain comes and goes with the success of their prediction. You could be an outsider proclaiming an esoteric truth about the stock market or a specific company one day, and suddenly find yourself famous the next day if those truths are realized. However, does success one time, or even a few times, entitle one to instance vindication every time a claim is made?

Such has become the case for David Einhorn, esteemed head of the hedge fund Greenlight Capital. David Einhorn correctly analyzed Lehman’s accounting discrepancies and also attacked Microsoft’s chief executive. His role in the fall of Lehman Brothers is even prominently featured in the popular novel “Too Big to Fail.” Now, Mr. Einhorn’s newest target is Green Mountain Coffee Roasters. After citing questionable accounting and financials, he announced a short position against the company’s stock on October 17^th. Almost instantly after the announcement, Green Mountain’s stock dropped from $82 a share to $70 a share.

The demise of Green Mountain’s stock only continued this week after it reported earnings on Wednesday that missed analysts’ expectations. Although it reported that quarterly revenue increase 91% from a year ago, Green Mountain disappointed analysts who had expected revenue to more than double. Although various reasons were provided for the discrepancy, the company’s stock dropped as much as 30% after the announcement. It is currently trading at around $44 a share, 60% lower than its peak share price of $111 in September.

Although Mr. Einhorn may have had a valid point in highlighting Green Mountain’s financial issues, it seems as though his allegations have almost become self-fulfilling prophecies. The stock dropped immediately after his announcement because investors highly value his judgment and they did not feel the need to first check into his claims. Furthermore, Mr. Einhorn’s claims were even further publicly highlighted because the company refused to counter his questions before their earnings announcement. Although Green Mountain is currently suffering a setback due to negative publicity as well as a missed earnings expectation, it will be interesting to see if Mr. Einhorn’s allegations hold up in the long run.

http://dealbook.nytimes.com/2011/11/09/green-mountain-stomped/

By Meha Patel