Einhorn Confusion Causes Herbalife Slump
In the letter, released Wednesday, Greenlight writes, in reference to its relatively weak fourth quarter performance, “Our coffee was too hot, our apple was bruised, and our iron supplements didn't go down smoothly.”
Some believed the last line, the reference to “iron supplements,” was indicative of a Greenlight short position in Herbalife. In fact, the metaphor was a reference to Einhorn's iron ore play.
Latter in the letter, Greenlight writes, “Our bearish thesis on iron ore is new, and we have shorted a number of stocks in the sector.” The fund then goes on to present a similar argument to one Jim Chanos has made in the past -- global demand for steel is sluggish, iron ore supply costs are low.
However, the new position has not been profitable for Greenlight just yet.
“In the fourth quarter, the price of iron ore and the related stocks rallied sharply. Given the considerable downside in the stocks, we are willing to be patient here,” Greenlight explains.
To return to Greenlight's original metaphor: its short Green Mountain (NASDAQ: GMCR) performed poorly as the stock rallied 70 some percent; its long Apple (NASDAQ: AAPL) was a loser as Apple dropped 30 percent; and its short iron ore position lost value as iron ore rallied.
(The use of the word supplements was likely a stylistic flair intended to fit with the concept of a nasty breakfast experience.)
If Einhorn really was referring to Herbalife, he likely wouldn't have said it negatively. The letter was for the fund's fourth quarter 2012 performance. In that case, a Herbalife short would've been a big winner for the fund, as the recent rally in shares of Herbalife mostly happened after the turn of the year.
Many have tried to connect Einhorn to Herbalife since he started the sell-off in the stock last May. In an earnings conference call, Einhorn asked Herbalife's management a few probing questions.
Given his track record, many assumed that Einhorn was shorting Herbalife. However, the bear in the stock turned out to be hedge fund giant Bill Ackman, who made his stake public in December.
Shares of Herbalife traded near $43 on Wednesday, down over 2 percent.
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