There are two possible reasons that GMCR shares have fallen 40% since David Einhorn's recommendation to short the stock:
1. Einhorn's analysis of GMCR was indeed correct and GMCR shares were grossly overrvalued
2. Investors simply sold off their shares in GMCR out of fear. Fear the almighty Einhorn!
I'm not buying Einhorn's recommendation and thus believe that investors sold their shares in GMCR out of fear. Although I admire David Einhorn and his brilliant analyses of companies, I think it was his stellar reputation that was responsible for GMCR's fall rather than the rationale provided in his analysis, which can be found at this link: http://tinyurl.com/6zoztck. Sure, Einhorn has had many successful short-sell recommendations such as Lehman Brothers, but all investors make mistakes.
Einhorn's two biggest reasons for shorting GMCR were unethical accounting practices and a likely loss of market share due to patent expiration. I guess I can't really argue with Einhorn on either one of these points, but that's only because we have known both of these things for a while now. Every stock analyst on the market and their mother knew exactly when GMCR patents were going to expire (this was explicitly stated in the 10K). Furthermore, GMCR accounting practices had already been in question before. If stock analysts and investors believed in GMCR prior to David Einhorn reciting information that they already knew, then why did so many people sell their shares? Fear.
The bottom line is that GMCR has a very strong product that has plenty of room to grow. Although there will be new entrants to the K-cup industry, GMCR's first mover advantage and long term contracts with powerhouse coffee companies such as Starbucks and Dunkin Donuts should help it maintain its competitive advantage.
Michael R Caligiuri owns shares of GMCR
No comments:
Post a Comment