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.
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.
|Trump campaign CEO Bannon was charged with domestic violence|
|Top exec at South Korea's Lotte found dead hours before prosecutor questioning|
|Richard Branson bike crash: 'I thought I was going to die'|
|What is BleachBit? Little-known tool at center of Clinton email controversy|
|Janet Yellen: Fed rate hike odds have 'strengthened'|