Notable shortsellers including Doug Kass, who runs Seabreeze Partners Management, are making a tidy profit off of the furious surge in Green Mountain Coffee Roasters shares, but longtime detractors of the stock aren't likely to have been so lucky.
Those who have been betting against the stock for some time, and there are many, are smarting with the stock's 30 percent jump on Thursday.
Late Wednesday, shares of the Keurig coffee machine maker briefly surged more than 60 percent in after-hours trading on news that Coca-Cola Co (KO.N) was taking a 10 percent stake in Green Mountain.
Kass proved nimble by shorting the shares Wednesday. In a note Thursday, he told clients: "I shorted Green Mountain stock at $128 a share at around 6:00 p.m. EST last night."
As a result of that short bet, which attempts to profit from the fall in the price of a security, Kass netted nice gains. Green Mountain shares are now trading around $106 a share Thursday after hitting a peak of $131.41 a share in after-hours action Wednesday.
Long-time short bets against the stock have been futile, however. Shares rose 82 percent in 2013, and short interest has come down as investors have given up on their bets.
The stock has long been a favorite target for hedge fund manager David Einhorn of Greenlight Capital, noted for his short calls. He wrote in his investor letter on October 15, 2013 that "We added to our short position in Green Mountain Coffee Roasters."
A spokesman for Greenlight Capital declined to comment on Einhorn's current position. In October, Einhorn dedicated 10 paragraphs on why he was shorting Green Mountain shares, saying, among other things, that "for years there have been questions about misconduct within GMCR's distribution and accounting departments."
Einhorn profited handsomely from his short bet on the stock between 2011 and 2012 when shares nose-dived.
A TOUGH STOCK TO SHORT
As of January 15, 2014, there were approximately 37.5 million shares short against a float of 121.6 million shares and compared to daily average volume of only about 3 million shares, according to Nasdaq data.
The high short interest and the heavy volatility in the shares made it a prime candidate for a short squeeze and thus dangerous to short, according to Thomson Reuters Starmine.
Kass said the high short interest compared with average daily volume meant that Green Mountain "should have been a nonstarter for me to short," because a sudden move would bring out lots of short-sellers scrambling to avoid more losses, pushing share even higher.
He added: "Nonetheless, sometimes (but only in rare instances) one has to reject formulae and move out of one's comfort zone. Such was the case with Green Mountain's share price move of almost $50 (or 55 percent), to $130/share last night."
In October 2011, Einhorn criticized the company with a 110-slide presentation, entitled "GAAP-uccino" at the Value Investing Congress in New York City.
Einhorn noted a September 10 New York Times article that reported a large discrepancy between the number of K-Cups Green Mountain said it sold and the numbers implied using data from tracking firm IRI.
"This new information raised the possibility that this activity is continuing, with GMCR potentially booking hundreds of millions of dollars of non-existent K-Cup sales," he said.
The stock was in the midst of a sharp correction after hitting a peak at nearly $111 a share in September. It ended up losing more than 85 percent of its value in about 10 months, during which time Einhorn remained short.