Oct 18

Green Mountain Coffee, Einhorn, & the Media as the Short-Sellers’ Pulpit

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The N.Y. Times, the Wall Street Journal, and others are reporting that David Einhorn’s presentation on Monday at the Value Investing Congress caused Green Mountain Coffee’s stock price to drop by more than 10% for the day. According to the news reports, Einhorn gave a 110-page slide presentation outlining his argument against the current share price. Einhorn pointed to Green Mountain’s alleged “poor transparency,” accounting “shenanigans,” and “out-of-control” capital spending.  Eihnorn also highlighted that Green Mountain’s patent on its K-Cup technology will expire in less than one year.

Einhorn is a well-known short-seller.  He bet against Lehman Brothers before its collapse and has written a book titled “Fooling Some of the People All of the Time.”

In their reporting of Einhorn’s presentation and the subsequent collapse, the N.Y. Times and the Wall Street Journal failed to mention how much Einhorn stood to gain if Green Mountain Coffee’s stock price dropped.  Einhorn disclosed his interest during his presentation but the media left out this bit of information when reporting on the event. This seems like a fact that should have been included.

Especially when little of what Einhorn said can be considered news.  Based on the reported contents of Einhorn’s Monday presentation, it didn’t contain anything that is not laid out in the company’s filings with the S.E.C.  The company has identified errors in its financial statements and restated financial results for the fiscal years ended  September 30, 2006, September 29, 2007, September 27, 2008 and September 26, 2009 and the first three quarters of fiscal 2010. The company also previously reported that it was being investigated by the staff of the S.E.C. Division of Enforcement.

The company’s capital spending is similarly set out in its public financial statements.  It’s no secret that the company has been spending money to enter into licensing deals (such as with Starbucks and Dunkin’ Donuts) and to purchase other coffee brands (such as Van Houtte and Timothy’s).

In short, under the theory of relative market efficiency, these facts should already be “baked into” the share price.

But Einhorn’s investment theory is that the investing world, which (until yesterday) made Green Mountain Coffee the best-performing stock on a major exchange over the past years, is not aware of or paying close enough attention to the company’s public disclosures.  And by presenting at the Value Investing Congress, which is reported on by the N.Y. Times and other publications, Einhorn found a means to proselytize his theory to the world. Why would he do that? Usually, investors who think they have an edge on the rest of the market hold it close to their chests. But as a short seller,  Einhorn’s investment rests on his ability to convince the market that his perspective on the company is the right one.  He will share his market “edge” to anyone who is willing to listen.

As the NY Times’ article on Green Mountain mentioned, Green Mountain cannot respond to Einhorn’s allegations because it is currently in the “quiet period” before its earnings release later this month. Thus, it must sit back and watch its stock price erode as a result of Einhorn’s presentation.

Einhorn’s theory may be correct; the stock of Green Mountain may be overvalued. But if it turns out he is right, his prophecy may have been aided by the media acting as his pulpit.

Whether or not Einhorn is correct, the stock price drop as a result of his presentation is real. And it may lead to a lawsuit against Green Mountain by disgruntled investors  who will argue that the stock price was inflated when they purchased the stock prior to Einhorn’s presentation.