The dangers of chasing David Einhorn: BioFuel Energy# Stock
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http://buzz.money.cnn.com/2012/09/17/einhorn-biofuel-energy/?so
Investors have followed David Einhorn's every move since he predicted Lehman
Brothers' coming demise in early 2008.
Chasing David Einhorn can be a dangerous investing game. Investors in a tiny
ethanol company should consider themselves warned.
Ethanol producers, particularly BioFuel Energy (BIOF), have been struggling
this year. The drought in the Midwest isn't going away, and in late August,
BioFuel Energy's investors learned that revenues for the first half of 2012
were down 20% from 2011.
But for the past two weeks, shares of BioFuel Energy, which are still down
25% this year, have soared simply because Einhorn, founder of hedge fund
Greenlight Capital, filed an SEC form noting that he holds 36% of the
company up from 34% in mid August. A spokesperson for Greenlight Capital
declined to comment further on the hedge fund's investment.
Shares of BioFuel Energy, which once soared above $120, tripled Einhorn's
since September 6 disclosure and now trade near $10 a share, up from $3 two
weeks ago.
The problem for investors racing to follow in Einhorn's footsteps is that
the prescient investor didn't actually choose to buy more shares. Einhorn
and Greenlight Capital simply own more because of what is known as a "true-
up" agreement. As part of an earlier arrangement, Einhorn received
additional shares of BioFuel Energy because the company failed to meet
performance objectives.
The SEC filing from earlier this month explicitly states that Einhorn
acquired additional shares "on August 27, 2012 for no additional current
consideration," i.e. he didn't necessarily want or pay anything more for
them.
Einhorn -- and Yahoo's (YHOO) favorite agitator Dan Loeb of Third Point
Management -- have been investors in BioFuel Energy since 2007. In 2010,
they teamed up to give the company a $19.4 million bridge loan to keep it
alive.
Related: Einhorn wins on Aetna-Coventry deal
The rapid ramp-up in price appears to be solely due to investors chasing
Einhorn. The stock is typically thinly traded. Its average trading volume is
about 160,000 shares a day. And the company's valuation is only $56
million, relatively tiny. But since the Einhorn disclosure, nearly a million
shares have changed hands each day -- despite the fact that nothing else
about the company appears to have changed.
Ever since Einhorn spelled out the case for Lehman Brothers' demise, months
before the bank collapsed, his recommendations or attacks of particular
companies immediately instigate a barrage of trading in the direction of
Einhorn's suggestion. His critique of K-Cup maker Green Mountain Coffee
Roasters (GMCR) also turned out well for investors who followed his lead and
shorted the stock.
But Einhorn isn't always right. And in some cases, investors simply
misinterpret his motivations. Before a hedge fund conference in May,
investors speculated that Herbalife (HLF) would be a company that he would
bash.
Shares of the nutritional supplement company sold off ahead of the
conference because Einhorn asked probing questions about the company a few
weeks earlier on a conference call for Herbalife investors. But Einhorn didn
't mention Herbalife at the hedge fund conference, and shares quickly
rebounded from their lows.
So investors in BioFuel Energy should be careful. They could wind up getting
hurt by simply following the herd and not reading the fine print in Einhorn
's latest SEC filing.
Investors have followed David Einhorn's every move since he predicted Lehman
Brothers' coming demise in early 2008.
Chasing David Einhorn can be a dangerous investing game. Investors in a tiny
ethanol company should consider themselves warned.
Ethanol producers, particularly BioFuel Energy (BIOF), have been struggling
this year. The drought in the Midwest isn't going away, and in late August,
BioFuel Energy's investors learned that revenues for the first half of 2012
were down 20% from 2011.
But for the past two weeks, shares of BioFuel Energy, which are still down
25% this year, have soared simply because Einhorn, founder of hedge fund
Greenlight Capital, filed an SEC form noting that he holds 36% of the
company up from 34% in mid August. A spokesperson for Greenlight Capital
declined to comment further on the hedge fund's investment.
Shares of BioFuel Energy, which once soared above $120, tripled Einhorn's
since September 6 disclosure and now trade near $10 a share, up from $3 two
weeks ago.
The problem for investors racing to follow in Einhorn's footsteps is that
the prescient investor didn't actually choose to buy more shares. Einhorn
and Greenlight Capital simply own more because of what is known as a "true-
up" agreement. As part of an earlier arrangement, Einhorn received
additional shares of BioFuel Energy because the company failed to meet
performance objectives.
The SEC filing from earlier this month explicitly states that Einhorn
acquired additional shares "on August 27, 2012 for no additional current
consideration," i.e. he didn't necessarily want or pay anything more for
them.
Einhorn -- and Yahoo's (YHOO) favorite agitator Dan Loeb of Third Point
Management -- have been investors in BioFuel Energy since 2007. In 2010,
they teamed up to give the company a $19.4 million bridge loan to keep it
alive.
Related: Einhorn wins on Aetna-Coventry deal
The rapid ramp-up in price appears to be solely due to investors chasing
Einhorn. The stock is typically thinly traded. Its average trading volume is
about 160,000 shares a day. And the company's valuation is only $56
million, relatively tiny. But since the Einhorn disclosure, nearly a million
shares have changed hands each day -- despite the fact that nothing else
about the company appears to have changed.
Ever since Einhorn spelled out the case for Lehman Brothers' demise, months
before the bank collapsed, his recommendations or attacks of particular
companies immediately instigate a barrage of trading in the direction of
Einhorn's suggestion. His critique of K-Cup maker Green Mountain Coffee
Roasters (GMCR) also turned out well for investors who followed his lead and
shorted the stock.
But Einhorn isn't always right. And in some cases, investors simply
misinterpret his motivations. Before a hedge fund conference in May,
investors speculated that Herbalife (HLF) would be a company that he would
bash.
Shares of the nutritional supplement company sold off ahead of the
conference because Einhorn asked probing questions about the company a few
weeks earlier on a conference call for Herbalife investors. But Einhorn didn
't mention Herbalife at the hedge fund conference, and shares quickly
rebounded from their lows.
So investors in BioFuel Energy should be careful. They could wind up getting
hurt by simply following the herd and not reading the fine print in Einhorn
's latest SEC filing.