Hedge Funds Making Big Bets

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Bullish Hedge Funds Bet Against Bearish Hedge Fund

Whether it is the Tortoise vs. the Hair or Tweety Bird vs. Sylvester, the public loves a juicy rivalry. The media is pitting hedge fund managers Patrick McCormack of Tiger Consumer Management and Dinakar Singh of TPG-Axon Capital Management against the famous David Einhorn of Green Light Capital. Today it was announced that McCormack and Sing purchased 500,000 shares and 2.5 million shares of Green Mountain Coffee Roasters (NASDAQ: GMCR), respectively. This is significant because David Einhorn previously shorted shares of GMCR. In addition, McCormack initiated a position in Chipotle Mexican Grill (NYSE: CMG) by purchasing 280,000 shares of the company. CMG is another company that Einhorn shorted more recently. This news caused the share price of Green Mountain to jump 9% and shares of Chipotle to rise over 2%.

Chipotle and Green Mountain Could Rise Even More

A simple bullish argument for Green Mountain and Chipotle is that the market overreacted to David Einhorn’s short positions in these companies. The effect that Einhorn’s bearish calls had on Green Mountain and Chipotle can be seen below. Green Mountain’s (green line) high occurred right before Einhorn released his negative views of the company on Oct. 17, 2011. Similarly, shares of Chipotle (blue line) retreated from their highs immediately after Einhorn announced his short position on Oct. 2, 2012. Shares of Green Mountain went from being up around 250% to being down 20%. And shares of Chipotle went from being up roughly 100% to being up only 20%.


<img src="/media/images/user_6/chipotle-vs-gmcr_large.png" />

It is noteworthy that shares of Green Mountain rebounded more aggressively than shares of Chipotle after today’s bullish news. To better explain why this happened, I would like to propose somewhat of a goofy analogy: a bouncy ball. If you drop one bouncy ball from two feet above the floor and drop another bouncy ball from twenty feet above the floor, which bouncy ball will bounce higher? The correct answer is that the bouncy ball dropped from twenty feet above the floor will bounce higher (I know this from personal experience).

As you can see from the graph above, shares of Green Mountain definitely dropped farther than shares of Chipotle. One could argue that this analogy is ridiculous because a larger share price drop does not necessarily suggest better value, but the traditional valuation metrics of both companies suggest that Green Mountain shares did get punished relatively more. Despite Green Mountain’s increase today, the two tables below (both from Fidelity.com) show that Green Mountain shares dropped more (valuation wise) and still look cheaper relative to Chipotle.

Green Mountain


<img src="/media/images/user_6/gmcr_large.png" />


<img src="/media/images/user_6/chipotle_large.png" />

In my opinion, the most notable metric above that one should use to compare the valuation changes of these companies is the 5-year average P/E ratio. Green Mountain’s 5-year average P/E ratio of 52 looks absolutely monstrous when compared to the current P/E ratio of 11. In contrast, Chipotle's 5-year average P/E ratio of 38 is not quite as large relative to Chipotle’s current P/E ratio of 30. This suggests that Green Mountain shares did indeed lose more of their value.

Tiger Global also likes Potential Buyout Candidate, Yahoo!

Patrick McCormack opened up another large position in Yahoo! (NASDAQ: YHOO) by purchasing 25 million shares. The chart and analysis below explain why investors are speculating that Yahoo! will be purchased in the near future.


<img src="/media/images/user_6/yhoo-pnqi-goog_large.png" />

The point of the chart is to show that Yahoo! has suddenly been behaving much differently than other companies in the Internet industry. Before I continue this brief analysis, it is important to point out that PNQI (the red line) represents the PowerShares NASDAQ Internet Portfolio that is comprised of many companies in the Internet industry. Up until Oct. 16 of this year, the share performance of Yahoo!, Google, and PNQI appear to have been highly correlated. In other words, when one of these three companies went up or down so did the other two.

However, after Oct. 16, we can see that Yahoo! shares started to rise while the shares of Google and PNQI started to decrease together. This suggests that the rumors of a potential buyout have boosted Yahoo! shares. In addition to this abnormal share price movement, Yahoo!’s relatively inexpensive shares, negative revenue growth, and extraordinary year over year earnings growth further suggest that the company is priming itself for a takeover. 

Calinvestments owns shares in Green Mountain Coffee Roasters. The Motley Fool owns shares of Chipotle Mexican Grill and has the following options: short DEC 2012 $21.00 calls on Green Mountain Coffee Roasters, short DEC 2012 $21.00 calls on Green Mountain Coffee Roasters, long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters, and long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters. Motley Fool newsletter services recommend Chipotle Mexican Grill, Green Mountain Coffee Roasters, and Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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