Is The Einhorn Phenomenon Getting Out Of Hand?

by: Bill Maurer

On Wednesday, hedge fund titan David Einhorn talked at the annual Sohn Investment Conference. Einhorn has been known, especially of late, for having huge impacts on stocks that he talks about. In 2011, he famously presented a short case against Green Mountain Coffee Roasters (NASDAQ:GMCR). That sent Green Mountain shares spiraling downward, and they recently hit a new low after a terrible earnings report. About two weeks ago, Einhorn asked some questions of Herbalife (NYSE:HLF), sending shares of the company plunging.

After Einhorn spoke Wednesday, we saw huge movements in stock prices in a variety of names, which I'll get into. Einhorn has been known for being right in the past, especially when it came to Lehman Brothers and a few others. Now, it is not uncommon for a stock to move when a notorious hedge fund or investment manager has expressed their opinion on the stock. When Warren Buffett starts a new position or increases a current position, we do see small rises in that stock, as investors believe that if Buffett is in the name, they should be too. Likewise, if Buffett exits a position or sells some, investors sell some shares as well.

But when it comes to Einhorn, we are not seeing small movements. We are seeing huge stock price movements. Green Mountain shares fell nearly 30% in just two weeks, and we recently saw Herbalife shares fall from $71 to $42 after Einhorn's questions to the company regarding its financials. So I have to ask the question, is the Einhorn Phenomenon getting out of hand? Let's take a look at Wednesday's conference news, and discuss the implications afterwards.

At the conference, Einhorn rattled off some worries about Martin Marietta Materials (NYSE:MLM), an industrial goods company that supplies the construction industry. Shares were trading above $74 for most of the day, but as Einhorn spoke, they dropped like a rock to a daily low of $63.64, before closing the day down 8.2% at $68.60. Daily volume spiked to 6 times the 3-month average, and shares are likely to be volatile the next few days.

Interestingly enough, Einhorn did not speak about Herbalife Wednesday, which sent shares rocketing higher off their 52-week low set Tuesday. Shares were up on the day already, and were trading around $44 when Einhorn was speaking. They jumped to nearly $50 before settling at $49.51, and were seen closing the extended hours session near $52. Shares have now regained 1/3 of the losses they have seen over the past two weeks. Should Einhorn continue to not mention the name, we could see the rebound continue.

Also at the conference, Einhorn mentioned his confusion over Amazon (NASDAQ:AMZN), talking about how revenues have grown tremendously but profits have not. Einhorn pointed to the very high price to earnings ratio, something I reiterated again just recently. However, attendees at the conference seemed confused by Einhorn's Amazon talk, so Amazon shares didn't see a huge drop. Shares declined from $225 to about $222.50, but rebounded to close above $224. If Einhorn does go after Amazon, it would not be surprising to see this stock easily under $200, and perhaps heading towards $150. I don't know if Einhorn would go after such a large company, but there are many in this market who just don't get Amazon's valuation.

Einhorn reiterated his positive feelings for Apple (NASDAQ:AAPL), which helped shares reduce some of their losses. Apple's stock rose about $4 in late trading, to end the day down $7. Apple has been a large holding in Einhorn's portfolio for some time, and Einhorn thinks the company is misunderstood as a below average technology maker. But here is my question, especially when it comes to Apple. If Einhorn came out today and questioned the company, would we see shares crash 20% in a day, and 30% or more in the weeks following, like we've seen with Green Mountain and Herbalife? If Einhorn were to have that kind of impact on Apple, he wouldn't just be moving one stock, he would be moving the entire market. Is that too much power?

I'm not questioning Einhorn's motives or his views of the companies here. He has definitely been very right on some names in the past, but he has also been very wrong about some others as well, including Sprint (NYSE:S) and Best Buy (NYSE:BBY). I am not here today to critique his performance. Mr. Einhorn has done very well for himself.

What I am questioning today are the movements associated with the stocks he mentions. When one person can move a stock 20% in a day or 40% in two weeks, and that person isn't even involved in the company's operations or management, do they have too much power? Warren Buffett doesn't even move stocks this much, and a lot more people follow him than Einhorn. Like I said above, what would happen if Einhorn spoke negatively of Apple? Would we see it drop to $450 in a day, or $350 within two weeks? I don't think we would.

But the Einhorn phenomenon is getting larger, and the effects it is having on individual names seems like it is getting out of hand to me.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.