Einhorn's Finally Profitable Keurig Short Dimmed by Takeover

  • Hedge fund manager had lost money on wager he ended in 2014
  • Greenlight bet against stock again this year at $102 a share

David Einhorn can’t catch a break on Keurig Green Mountain Inc.

At an investor conference in October 2011, the founder of Greenlight Capital pitched the maker of single-serve coffee brewers as a short, citing “accounting questions,” slowing growth and coming patent expirations on the pods used in the machines. He held on as the shares climbed, only to to bail on his wager in the third quarter of 2014, just months before the stock started tumbling.

Einhorn jumped back into the short this year at an average price of $102.08, he disclosed in an October letter. He was finally making money as the shares plummeted to less than half that level. Then came Monday, when a JAB Holding Co.-led investor group said it would spend $13.9 billion to buy the company. The purchase price of $92 a share represents a 78 percent premium over Friday’s close, erasing much of Einhorn’s paper gain on the position this year.

The buyout is one more piece of bad news in a difficult year for Einhorn. Keurig was his third-most profitable position this year, according to a letter he sent to clients in late October, a bright spot in a portfolio that fell almost 21 percent in the first 11 months of 2015. That’s nearly as bad as his losses during the 2008 financial crisis.

He’s not the only bear to miss out as the stock rocketed. In late 2012, investors had shorted as much as 29 percent of the outstanding shares in Keurig. The stock climbed more than fivefold between then and the peak in late 2014.

Today, short interest is almost 8 percent of outstanding shares, higher than 89 percent of companies in the Standard & Poor’s 500 Index, as weak results and dimming prospects weighed on the stock this year. The company suffered from waning sales of its K-Cup pods and lower prices on brewers. A new cold brewer was rolled out more slowly than expected. The strong dollar also hampered international sales.

Patent Blunder

In an letter sent to investors in November 2014, just two weeks before the stock hit its high of $157.10, Einhorn congratulated the Keurig bulls and outlined what he’d gotten right and wrong in his thesis. He said his assertions of accounting “shenanigans” were “unrefuted and accurate,” yet the U.S. Securities and Exchange Commission opened and eventually closed an investigation into the company.

Sales growth had slowed over the years Einhorn had shorted the stock as well. Where he acknowledged getting it wrong was on the 2012 expiration of patents for the K-cups. Last year, the company rolled out a new machine that blocks brewing if a non-Keurig pod is used.

“We had many opportunities to trade this position to a successful result, but failed to do so,” he wrote in the November 2014 letter. His average sale was at $47.59 and average cover was at $67.02, according to the letter.

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