Hedge fund manager David Einhorn is taking an even harder line against Green Mountain Coffee Roasters, his big short trade, claiming a recent audit committee review of the accounting issues he flagged is nothing more than a “whitewash.”
In an exclusive interview with Reuters, Mr. Einhorn said he still doubts sales figures and spending plans at the company, which saw its stock soar to $110 (U.S.) in August on the rapid growth of its individual coffee servings or K-cups. When Mr. Einhorn revealed in October that he had been building a short position in shares of the company for weeks, the stock tanked and it effectively turned things around for his $8-billion Greenlight Capital fund this year.
“I think everything we said in the presentation is right now as it was then – and in many cases even more so,” said the 43-year-old manager, who runs one of $2-trillion hedge fund industry’s better-known long/short funds and also is an accomplished poker player.
In the interview with Reuters, Mr. Einhorn blasted the company’s audit committee for conducting a “whitewash” review of the concerns he raised in an Oct. 17 presentation entitled, “GAAP-uccino.” That presentation hit Green Mountain like a tidal wave, and has sliced the stock’s value in half to around $46 as of Tuesday trading.
Mr. Einhorn’s presentation seemed prescient and awoke traders to potential problems with Green Mountain’s growth story. Green Mountain reported a massive earnings disappointment in November in another blow to investor confidence. The stock, which had been a favourite of many in the hedge fund set – most notably John Thaler’s JAT Capital – now ranks as a popular short for managers.
Green Mountain spokeswoman Suzanne DuLong rejected the suggestion the company has given short-shrift to complaints about its accounting practices.
“The audit committee, with the assistance of counsel and a forensic accounting firm, completed its investigation of accounting practices at the company in December 2010,” she said. “Most recently, as our CEO and president, Larry Blanford reported in the November 2011 earnings call: ‘We are confident there is no misconduct, there is no wrongdoing.’”
In recent years, Greenlight Capital has emerged as one of the more influential hedge fund firms, and Mr. Einhorn is one of a handful of savvy traders who can move markets with his “short’ calls.
Mr. Einhorn made his name by warning about Lehman Brothers Holdings Inc’s financial health before the investment bank’s bankruptcy, and from a long-running battle with the management of Allied Capital Corp, an investment company.
A high-profile bid Mr. Einhorn made this year to buy a significant minority stake in the New York Mets fell apart this summer – something of a personal disappointment to the manager who calls himself a lifelong fan of the professional baseball team.
Mr. Einhorn would not say how big of a short position in shares of Green Mountain his Greenlight fund still is. But his bet has been something of a life saver for his fund in a difficult climate for many hedge funds.
This summer, Greenlight was posting middling returns. In August, for instance, his fund was down 5 per cent for the year. Now the fund is up about 5 per cent, significantly better than other hedge funds, many of which were down roughly 4.37 per cent through November, according to Hedge Fund Research’s broadest industry index.
Mr. Einhorn hasn’t disclosed just how profitable his Green Mountain trade was to his fund. But his talk with Reuters about the trade reveals the manager is clearly sticking to his convictions.
REUTERS: Which of the issues you raised in your presentation do you believe Green Mountain has answered so that you would change them?
EINHORN: “Actually, I think everything we said in the presentation is as right now as it was then – and in many cases even more so. Some of the things we pointed out, like the inexplicable sales of K-Cups in the June quarter, have now been revealed to have been very valid concerns and the rest remain unanswered. And some of them are things will have to sort of play out in the future like the competition.”
REUTERS: Management says that fourth-quarter sales were hurt by wholesale orders, and do not indicate any accounting issues. In other words, you were right, but for the wrong reasons. Were you surprised by the earnings miss?
EINHORN: “The thing about an investment like this is that there are really a lot of ways for us to come out well because the risk-reward for the stock is so poor. And there are so many problems that they don’t all have to hit at the same time in order for us to get a good result. In terms of what actually did cause them to miss the quarter? It was largely a sales miss, which seemed to follow from the unexplained sales spike that we highlighted in the presentation.”