What Fidelity Does With Green Mountain Shares Could Be a Tell

NEW YORK (TheStreet) -- To break a stock, the goal of a short like Greenlight Capital's David Einhorn isn't getting the retail investor to run scared, it's to get the big institutional holders of shares to capitulate. In the case of Green Mountain Coffee Roasters (GMCR), this means the most important "tell" will be what mutual fund giant Fidelity Investments does -- or has already done -- in response to the demise of Green Mountain Coffee shares.

Fidelity is the largest shareholder of Green Mountain Coffee Roasters as of its last quarterly portfolio report, through June 30. That report, filed with the Securities and Exchange Commission on Aug. 16, showed that the mutual fund giant had increased its stake in Green Mountain Coffee by 4.7 million shares during the second quarter, to 19.1 million shares.

The second-quarter buying by Fidelity was a 32% increase in its Green Mountain stake, and represents 12.5% of Green Mountain's outstanding shares, according to the Imetrix service from Edgar Online. Overall, Green Mountain shares are 75%-owned by institutional investors.

Green Mountain Coffee shares have been decimated since Einhorn went public with his short campaign and accusations of accounting fraud at Green Mountain. Shorts typically use accounting fraud as a scare tactic to scare the big investors out of a stock they are looking to break, whether or not the accusations turned out to be founded in reality or merely a good scare tactic. Wednesday's Green Mountain earnings disaster has only exacerbated the existing tension and lack of investor comfort with its management.

It's an interesting counterpoint to the very public and very vocal approach of the shorts like Einhorn that an institutional giant like Fidelity never says anything about the positions it holds, even when those positions are under attack. There's a simple explanation: While the shorts like to "talk their book" the longs among the big institutions don't consider that an appropriate strategy. There's a second reason why long-only investors are typically quiet: oftentimes they are major holders of shares because of an index fund or exchange-traded fund, which is basically run on auto-pilot.

Fidelity Investments can invoke the first reason for not speaking up, but as for the second, it's not a valid reason for Fidelity to remain quiet about Green Mountain. Fidelity has invested in Green Mountain Coffee among several of its most popular actively managed strategies -- i.e., funds for which human portfolio managers are making qualitative decisions to invest.

When Einhorn went public with his campaign against Green Mountain, TheStreet asked Fidelity Investments, as well as the other top 10 shareholders in Green Mountain Coffee, if they could offer any defense of the stock in response to Einhorn's accusations or a simple list of criteria for why they believe the stock was a buy.

Several of the top 10 largest Green Mountain shareholders never responded; some simply said they would "pass" on the opportunity to comment.

As for Fidelity Investments, the largest holder of Green Mountain shares, the mutual fund giant gave TheStreet the courtesy of a reply but only to say nothing.

The four largest mutual funds holding Green Mountain shares are Fidelity funds:
  • Fidelity Contrafund (FCNTX)
  • Fidelity Magellan (FMAGX)
  • Fidelity Mid-Cap (FMCSX)
  • Fidelity Growth Company (FDGRX)
  • To be clear, there is no reason for Fidelity investors to panic, as the Green Mountain holding is typically a very small percentage of any one fund. Only Fidelity Mid-Cap had a sizable percentage of its assets in the coffee stock, with 3.4% of its fund invested in Green Mountain, according to Morningstar. Magellan had 1.25% of its holdings in Green Mountain shares, though a recent portfolio manager change at Fidelity's flagship fund could also impact portfolio decision-making. Contrafund had only 0.34% of its holdings in Green Mountain and Fidelity Growth Company only 0.6%.

    Russ Kinnel, director of mutual fund research at Morningstar, said Fidelity typically runs a more diffuse equity portfolio than active management peers due to its size; however, it is a growth-oriented manager and that means by its nature the Boston-based fund giant is attracted to names like Green Mountain, "for better or worse."

    Green Mountain and Fidelity's large position in the stock are illustrative of the downside of growth investing, Kinnel said. "Green Mountain had the growth trajectory of a stock that an active manager like Fidelity would notice and there are lots of expectations and the stock gets killed when it disappoints," the Morningstar research director said.

    Market experts will tell you that the longs have little to gain by making a public battle vs. the shorts over a stock, and that's probably a valid argument. Fidelity can simply bulk up on shares of Green Mountain as it declines as a behind-the-scenes endorsement, too. However, it's cold comfort for Fidelity shareholders as well as any investor attempting to assess whether there is -- as the sell side will tell you -- a buy-on the-dip opportunity in Green Mountain's dive.

    That makes Fidelity's insider buying and selling activity a potential tell on whether the biggest owner of Green Mountain shares still has conviction in this stock.

    Recent activity in the Fidelity funds shows that buying and selling "wash" when it comes to Green Mountain. Even though the last full quarter portfolio update from Fidelity is as of June 30, the funds each reported on their own as of the end of the Sept. 30 quarter. Fidelity Mid-Cap, which has the largest holding in Green Mountain, had sold a net 931,000 shares of Green Mountain. Yet Magellan had added more than 2.3 million shares as of Sept. 30. Contrafund had sold 139,000 shares and Fidelity Growth Company had no net position change in Green Mountain.

    Of course, the Sept. 30 period pre-dates the value investing conference where Einhorn went public with his short in mid-October, so it's Fidelity's action from here on out that investors should watch for any "tell" from the fund giant that its managers aren't buying and selling individually, but making a conviction call -- either dump or buy on the dip -- in Green Mountain shares. What's more, Morningstar's Kinnnel said that with a stock like Green Mountain -- not a blue chip large-cap -- it is likely that Fidelity has one analyst who is the "conviction" decision-maker across all of its funds, even if the funds diverge on quarter to quarter buying and selling, and given the recent action in Green Mountain shares, this might be a time when the fund giant's portfolios all move in the same direction.

    If Fidelity has upped its ante in Green Mountain during the third quarter -- which we won't know for a while yet -- it would suggest there is at least one big shareholder, the biggest in Green Mountain, who isn't running scared of Einhorn or one bad quarter, or the big inventory build at Green Mountain, and its massive spending plan increase. If, on the other hand, Fidelity starts dumping Green Mountain shares en masse -- or already has -- buying on the dip would put the average investor at odds with the one of the biggest fund companies out there.

    "With 10% to 12% ownership in this stock it does mean that they Fidelity have some impact, if they all want to sell or all bought at the same time, and especially if the latest news has a bunch of their managers queuing up to sell," Morningstar's Kinnel noted.

    -- Written by Eric Rosenbaum from New York.


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