How Smart Is Smart Money?

February 08, 2013   Stephen Taub

Media savvy managers have mastered the art of touting stocks but momentum from the publicity may be short-lived.

This script is starting to get a little old.

Big-name hedge fund manager’s investment is down, or under water. The manager makes a case for his investment in the public realm, thus ensuring headlines.

Presto. His investment instantly goes in the desired direction.

It’s just another tool in a hedge fund manager’s toolkit, but it usually works like a charm. The latest example played out yesterday when Greenlight Capital’s David Einhorn, who’s mastered this tactic, fired off a press release urging Apple to take steps to unlock balance sheet value, including distributing preferred stock with a 4 percent annual dividend, and filed suit to show he means business.

Einhorn, who later went on CNBC to further his case, made it known he remains a big fan. Not only has he owned the stock since 2010, he says, but he holds more Apple shares today than ever before, notwithstanding some trades in the intervening period.

"The company has a problem of a depression," he told the Squawk Box audience. "People who have gone through traumas feel they never have enough cash."

How did Apple’s stock perform for the day? You guess right. The stock surged $9 at the open. But then it closed at $468 on an otherwise down day on Wall Street.

This is by no means a unique event for one of the most sophisticated media hounds in the hedge fund industry. More than a decade ago, Ackman famously ripped into finance company Allied Capital for its flawed business model, advising the country’s top investors to short its stock, then wrote a book, "Fooling Some of the People All of the Time," about his hard-won triumph.

In recent years, the hedge fund manager, who’s also a poker player of some reknown, has targeted companies such as Lehman Brothers, Green Mountain Coffee Roasters, Taco Bell and Chipotle Mexican Grill.

Another old hand at this is Pershing Square Capital’s William Ackman. Witness his showcasing Herbalife in December, when he packed several hundred people into a midtown Manhattan auditorium on a day’s notice, before plunging into a three-and-a-half-hour, 300-plus slide presentation behind his short position on the nutritional-supplements supplier. Very few people walked out in the middle.

Einhorn is someone who knows how to work with media, being married to a veteran financial journalist and media analyst. (He is married to former Barron’s columnist and CNBC analyst Cheryl Strauss Einhorn.)

Einhorn and Ackman are hardly alone. Portfolio managers routinely tout their stocks at conferences and other public forums. Whether these are made to account for how their stock picks ultimately perform is another question.

But I digress. There just seems something unseemly when hedge fund managers do it.

Maybe it is because hedge fund managers have felt for decades that it was a badge of honor to neither be seen nor heard. (This columnist can attest to at least one occasion when Einhorn agreed to sit for a lengthy magazine interview but declined to be photographed.) The more opaque they were, the more mystique they created for themselves, and the more followers deemed them to be the smart money elite.

Indeed, one way for a hedge fund manager to subtly announce their arrival was to suddenly stop speaking publicly.

No longer. These days, visibility is the word. Many firms now have fairly detailed websites — a vast improvement for hedge funds, particularly for the likes of Israel Englander’s Millennium Management, among the most secretive of them all.

This is not totally a bad thing, mind you. You can find some interesting information from annual disclosures now required of firms that must register with the Securities and Exchange Commission.

Still others hawk books and tout stocks at conferences and on CNBC.

Some of this publicity seeking can be a stroke of genius. I have long felt the shrewdest thing Ackman did when he launched Pershing Square in 2004 was to make himself available to the press and openly talk about why his previous fund, Gotham Partners, closed down. He delved into what exactly happened in his dealings with then New York State Attorney General Eliot Spitzer, who had briefly investigated the hedge fund manager, only to drop the probe altogether when he found no wrongdoing.

If he had remained mum, he probably wouldn’t have created as much curiousity and interest around him. His fund and his reputation would have been questioned for years without Ackman being able to defend himself, and every article would have tried to cast his Gotham Partners experience in an unfavorable light. The media would have endlessly speculated and perhaps made up Ackman’s narrative for him. Instead, he addressed the issues head on, and moved on.

Today, a few star hedge fund managers have joined Einhorn in playing the public like animal trainers in a circus. They know when they say "Buy," the stock will soar, and vice versa.

However, it doesn’t always pan out as expected. True, they may get an initial bump. But they know that if they cashed out of their investment soon after, the regulators would probably be all over them.

Of late some of these well-publicized picks have gone opposite the desired direction. Green Mountain dropped about 80 percent in the nine or so months after Einhorn publicly pitched his short. But then it nearly tripled before tumbling on Thursday by more than 3 percent, when it gave a weaker than expected outlook for its business.

Chipotle immediately fell after Einhorn made his case for shorting the Mexican fastfood company in early October. On Thursday the stock is above the price it was the day he made his presentation.

Ackman’s Herbalife short was initially very successful. But the stock has surged since his presentation, after several high-profile investors either bought or touted the stock.

The moral of the story is actually reassuring. The so-called smart money set may be able to influence a stock’s performance or direction for a day or two or week. But, over a longer period of time the company’s fundamentals — things like revenues, profits, growth, margins, competition and new products and investment — ultimately determine a stock’s direction.

This is not a bad thing. It is how it should be.  

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