Is David Einhorn Shorting This Stock?

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

It’s a hot stock. It has been on a monster run over the last few years, doubling, perhaps even tripling. Its success has been fueled by an incredible new product; one that’s taken the market by storm.

Is David Einhorn shorting it?

Rumors

Over the last few months, Einhorn has been linked to a number of stocks. Most of them would fit the above criteria.

The periodic speculation has been enough to solicit an official response from Einhorn, who told the Value Investing Congress in October of 2012 that he didn’t know where the rumors came from and that, more importantly, they generally weren’t true.

Most stock rumors prove to be false. Market participants largely factor this doubt in, so the typical rumor will only result in a relatively tiny move in a stock --  if at all.

However, the recent rumors surrounding Einhorn have been somewhat plausible (given his investing style), which has meant that they’ve produced notable shifts in the market. In fact, investing on one rumor in particular had the potential to net traders large profits, assuming they had timed their trades perfectly.

Einhorn’s style

Although Einhorn has risen to fame largely by shorting financials -- Allied Capital and Lehman Brothers in particular -- he has a habit of dipping his toe into the more interesting side of the market.

Specifically, Green Mountain Coffee (NASDAQ: GMCR) and Chipotle Mexican Grill (NYSE: CMG).

Both stocks surged in recent years, bringing shareholders large capital gains.

Green Mountain Coffee

Green Mountain rallied as the market it largely invented -- the single-serve coffee brewer -- exploded in popularity. Shares started 2009 at $8.68; by the fall of 2011, they were over $100 per share.

Then, Einhorn entered the picture.


In October of 2011, Einhorn gave a presentation in which he argued that Green Mountain had nearly maximized its share of the market with widespread brand recognition. He also brought into question the status of its patents (not to mention the accounting questions he raised).

In short, Einhorn drew the point that the single-serve coffee market wasn’t the future of coffee drinking, but rather an aspirational offshoot. What’s more, even if it did become the future, Green Mountain wasn’t necessarily the one who stood to benefit -- its patent expiration would mean a host of generic competition possibly fatal to its razer/razer blade pricing model.

Shares plunged as Einhorn’s prediction played out, falling below $20 per share at one point (though they have since rebounded to some extent).

Chipotle Mexican Grill

Einhorn told investors that he believed Chipotle’s stock was due to fall in October of 2012.

Specifically, Einhorn thought that the company was trading at an unreasonable valuation and that its staple product -- high quality burritos and burrito bowls -- faced pressure from Yum! Brands Taco Bell Cantina Bowls.

Chipotle, like Green Mountain, was a stock that ran up on the success of its product. At the beginning of 2009, shares were trading around $64. By the spring of 2012, Chipotle stock was trading around $440.

Chipotle built its empire by bringing high quality (but relatively cheap) fast food to the masses.

Einhorn’s pattern

Both shorts exhibit a pattern: A high flying company that created a new market coupled with eager investors that propelled shares to (temporarily?) unrealistic heights.

Companies that Einhorn has been linked to largely fit this profile, so it isn’t hard to see how a rumor could affect the market.

Monster Beverage (NASDAQ: MNST)

Shares of Monster Beverage plummeted on January 18, falling nearly 10 percent. Rumors indicated that Einhorn had sold short shares of Monster.

Does Monster fit Einhorn’s pattern? To some extent, yes.

Monster shares were trading near $20 at the beginning of 2010, but more than quadrupled, peaking near $80 in the spring of 2012. Shares have traded lower as speculation has indicated that there could be some regulatory issues facing the company. Still, trading near $50, shares are up significantly in the past few years.

Monster is interesting from the perspective that it is the only “pure play” energy drink stock. With rivals RedBull and Rockstar being private companies, and brands like Full Throttle being owned by much larger, diversified corporations, Monster is the only stock available for traders to speculate on the growing energy drink industry.

RedBull started the trend over a decade ago, but energy drinks have exploded in popularity in just the last few years. Despite a countless number of competitors, Monster has been able to remain one of the top brands.

One could imagine Einhorn shorting the stock on expectations that the energy drink fad had run its course, or that recently launched flavored variations of RedBull would eat away at Monster’s market share.

lululemon (NASDAQ: LULU)

Known for its yoga apparel, lululemon has been a monster stock for the bulls over the last few years. At the same time, it's attracted a crowd of short sellers. T2 Partners’ Whitney Tilson proclaimed his doubts publicly, arguing that a business built on selling $70 yoga pants (that cost mere pennies to produce) wasn’t sustainable.

Is Einhorn among the shorts? CNBC asked luluemon’s CEO, Christine Day, about the rumors. Day stated that she had not spoken to David, but was open to discuss the company’s situation with him.

Here again, one could imagine Einhorn arguing that high-priced yoga pants are the next fad ready to implode; or that competition from established players like Nike would limit lululemon’s earnings potential.

Netflix (NASDAQ: NFLX)

Einhorn told the Motley Fool’s own John Reeves that Netflix “didn’t fit his short criteria” and that it “wasn’t one of [Greenlight’s] short positions.”

However, that interview took place two years ago. Since then, Einhorn’s position on Netflix might’ve changed. On January 16, shares of Netflix moved lower early in the day on speculation that Einhorn was short the stock.

Of note, Einhorn did tell Reeves that he thought Whitney Tilson’s bearish Netflix argument was interesting, specifically mentioning Netflix’s growing content costs.

As Tilson originally speculated, content costs for Netflix have been increasing (as evidenced by the recent deal with Disney). Could Einhorn have reconsidered this trade?

SodaStream

SodaStream might be, on a product basis, the most similar company on this list to Green Mountain. Both companies specialize in beverage machines. In fact, when Einhorn originally targeted Green Mountain in the fall of 2011, shares of SodaStream dipped as well.

Shares of SodaStream experienced rapid price appreciation early in 2011, before peaking around $75 and subsequently collapsing. Still, shares have quietly begun to rebound, and the stock is now back above $50.

If Einhorn interprets the market for such a device as being fully saturated, with little room for further growth, he might have considered such a position. Rumors of an Einhorn short position made the rounds as recently as January 22.

Herbalife

Admittedly, Herbalife doesn’t fit the criteria. But it’s worth mentioning because its an Einhorn rumor that investors might have profited from (assuming somewhat good market timing).

Einhorn asked Herbalife’s management a few questions in an earnings call last May. Given his history as a short seller, and the probing nature of the questions, Herbalife shares dropped as investors began to speculate that Einhorn was shorting the company.

Sure enough, short interest began to rise. Yet, in a somewhat bizarre twist, it turned out that it wasn’t Einhorn that was the bear in the market, but rather rival hedge fund manager Bill Ackman.

Ackman revealed his short position in December, and shares plunged from the mid-$40s to the mid-$20 range. Shares have subsequently rebounded tremendously, so those shorts who held through January may have seen their gains erased.

Conclusion

To repeat Einhorn, most of the rumors about the hedge fund manager simply aren’t true. Perhaps he has shorted these companies at one time or another, and perhaps not.

Either way, it seems that companies such as these (consumer-orientated rapid growth stocks) could continue to see Einhorn-fueled speculation. Particularly if he continues to target companies like Green Mountain Coffee and Chipotle Mexican Grill.


The author is short a relatively small number of shares of Chipotle, Netflix and Green Mountain. The Motley Fool recommends Chipotle Mexican Grill, Green Mountain Coffee Roasters, Lululemon Athletica, Monster Beverage, and Netflix. The Motley Fool owns shares of Chipotle Mexican Grill, Monster Beverage, and Netflix. 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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