Einhorn's Kiss of Death Isn't Fatal

Another stock got Einhorned last week. We saw Athenahealth (ATHN) surrender 11% of its value last week after Greenlight Capital President David Einhorn made it his latest prolific short target, suggesting that shares of the health care IT provider could fall by as much as 80%.

Einhorn's comments were made at the Sohn Investment Conference where hedge-fund managers and other value mavens offer up compelling investing ideas. Einhorn tends to carry a lot of weight whenever he presents at Sohn or the Value Investing Congress later in the year, particularly for his bearish arguments. He doesn't phone it in with his presentations. Einhorn is backed by thorough research that often stretches well past 100 slides. 

He may very well be right about Athenahealth, though it's fair to say that the stock shedding four-fifths of its value is more than a little extreme. Managing electronic health records is a booming industry, especially in light of the Affordable Care Act that is incentivizing clinics and doctor offices everywhere to embrace the digital age when it comes to patient information. 

It's not as if the stock is perfect. Revenue climbed 30% in Athenahealth's latest quarter, but net margins have been contracting to the point where profitability is going the wrong way. Analysts see earnings per share declining slightly this year despite targeting a 25% pop in revenue. This bestows a ridiculously high earnings multiple on the shares, and Einhorn gravitates to these kinds of situations.

Scorecard, please
Einhorn moves stocks, and that was made clear when Athenahealth tumbled nearly 16% in the three days following his comments. It's not atypical. When Einhorn speaks sellers listen. This is naturally painful for investors in the stocks that he's targeting, but what happens after the naysayers have their say? 

Let's take a look at the three stocks that Einhorn singled out in his last three Value Investing Congress presentations.

• Four years ago his target was St. Joe (JOE 1.22%). He had a 139-slide presentation to back his argument that its massive Florida real estate holdings were being overstated on its balance sheet. The stock fell 10% on the day of his presentation and another 10% the following day.
• A year later it was Keurig Green Mountain (GMCR.DL) in his crosshairs. The stock tumbled 10% the day that Einhorn knocked the single-serve java champ's accounting practices, dropping 24% over the course of three trading days. With K-Cup patent expirations a year away it was easy to wonder about its growth prospects.
• A year after that he aimed for Chipotle Mexican Grill (CMG -1.34%). A "nose bleed valuation" and intensifying competition from Taco Bell fueled his bearish argument on the burrito roller. Chipotle slumped 11% four trading days later.

It wasn't necessarily safe to buy the stocks a few days later. Some initially bounced back -- just as Athenahealth made back some of its losses on the fourth day when its CEO went on the offensive -- but Einhorn was vindicated a year later. St. Joe and Green Mountain shares went on to lose 38% and 74% of their value, respectively, a year after Einhorn's presentations. Chipotle did buck the trend by closing 35% higher a year after Einhorn's remark, but all three stocks are trading markedly higher today. 

Source: Yahoo! Finance

Three stocks don't make up much of a sample size, but we're eyeing an average decline of 26% a year after Einhorn presents his bearish case. That's impressive at a time when the economy's recovering. But if investors would've bought these stocks a year later they'd be brandishing gains of 30% on St. Joe, 358%, on Keurig Green Mountain, and 19% on Chipotle. That's a huge 136% average gain, even if it's largely distorted by the sharp fall and rise at Keurig Green Mountain. If we go back to the starting line the day before Einhorn's bearish missives, the average return for the three names is a more modest 20%. 

Evaluating where stocks are today isn't exactly fair to Einhorn. He has closed out some of his short positions, and his convictions change alongside a company's fundamentals. But we can argue that Einhorn's kiss of death isn't deadly in the long term. Even if he proves to be right about Athenahealth in the short run, history has been kinder to the longs in the long run.