Einhorn's Greenlight dealt another blow with Keurig Green Mountain

By Jennifer Ablan and Svea Herbst-Bayliss

NEW YORK (Reuters) - Billionaire investor David Einhorn of hedge fund Greenlight Capital, who bet against Keurig Green Mountain Inc (GMCR.O) shares, suffered a blow on Monday when the coffee maker agreed to sell itself to JAB Holding Co, sending its stock up 74 percent.

Einhorn, already one of this year's biggest losers, told investors in October that he had re-entered his famous short position in Keurig when the stock was trading at $102.08. Greenlight Capital lost nearly 21 percent in the first 11 months of the year and was down 5 percent in November, when Keurig traded near $40. On Monday it shot up to $89.69.

"The second time has been a charm, as our original thesis is playing out," Einhorn wrote about the position in his fund's third-quarter investor letter dated Oct. 21. "So far, our third-biggest winner this year."

Einhorn could still make money on the short position if he added to it as the shares continued to fall in recent months. A spokesman for Greenlight Capital declined to comment.

Investors who take short positions borrow stock and then sell it in hopes of being able to buy it back at a lower price later. They then return the stock to the lender and pocket the difference.

However, if a stock surges, a short seller's losses can climb very rapidly, making it too risky to hold on even if they still believe the stock price will eventually collapse.

Keurig has captivated the hedge fund community for years. Many investors believed the coffee pod maker could not sustain its sales growth, especially as it faces increased competition. By the middle of November funds had sold 14.1 million shares short.

“This has been one of those battle ground stocks and investors have had a variety of swings at it with both the longs and the short having been able to make money on it depending on when they pulled the trigger,” said Herb Greenberg, a partner at short-biased independent research firm Pacific Square Research.

In November 2014, around the time Keurig Green Mountain's stock was peaking, Einhorn said in a letter to Greenlight's investors that he had closed out the rest of his short position. While Einhorn made it clear he had done so long before the stock's high, it had still been a painful episode. It would be "tempting to write an entire book on our experience with this ultimately unsuccessful short," he wrote in a quarterly report.

Keurig, which makes K-Cup single-serve coffee pods, said on Monday that an investor group led by Germany's JAB would buy the company for about $13.9 billion (9.22 billion pounds). The deal, pitched at a rich 78 percent premium to Keurig's Friday close, is the latest by JAB as it seeks to become a formidable competitor to world coffee market leader Nestle SA (NESN.VX).

For Einhorn's investors, including pension funds, endowments and wealthy individuals, the Keurig news is bound to bring up more frustration with a manager who has long reigned as one of Wall Street's best stock pickers, with an average annual return of 20 percent for nearly two decades.

But with this year's losses putting Greenlight on track to post its second-ever down year, investors expressed concern about the manager's ability to construct his portfolio. "His longs aren't working and his shorts aren't working," said an investor who requested anonymity because the fund is private.

Keurig's rise, however, has helped some investors, including Eminence Capital, which owned 3.7 million shares at the end of the third quarter.

Mutual funds Fidelity Investments, T. Rowe Price (TROW.O) and Vanguard were the biggest investors in Keurig.

(Reporting by Jennifer Ablan and Svea Herbst-Bayliss; Editing by Lisa Von Ahn)