NEW YORK (TheStreet) -- Shares of ethanol producer BioFuel, (BIOF), got cut down this morning after shooting up like a magic beanstalk on news that a prominent hedge fund investor increased his stake and proposed that the company acquire a real estate developer. The price action spurred debate on StockTwits.com between BioFuel bulls and bears on the wisdom of chasing "smart money."
$BIOF Continues to create bags on both sides of the trade.-- Sjvan (@sjvan) Apr. 1 at 09:36 AM
The small-cap company saw shares rise from $3.16 to close at $7.30. This morning, shares retreated 12% to $6.41.
Bull Argument: Trade Like The Big Boys
The primary argument for BioFuel bulls is that Greenlight Capital's David Einhorn is no dummy. Einhorn's hedge fund has returned 19.5% a year, on average, to investors since its inception in 1996, according to Greenlight's latest shareholder letter, released Jan. 21. If Einhorn thinks BioFuel has promise, then it probably does.
$BIOF Greenlight's Einhorn's trying to get his company some assets and start making it money and you people are bearish??-- Timothy Daube (@Timothykpny) Mar. 31 at 08:10 PM
$BIOF Downplay spin it all you want it how some other stock in sector seems better Blah blah. They don't have Einhorn and green light-- Heikin-Ashi (@a5hi) Mar. 31 at 10:18 PM
Bear Argument: Smart Money Doesn't Often Out-Smart The Market
Einhorn may be brilliant, but he didn't exactly outsmart the market last year. He returned 19.1% in 2013. The ETF that tracks the S&P 500, SPDR S&P 500 ETF (SPY - Get Report), returned 26.45% in the same period.
Einhorn maintains that, as a responsible hedge fund manager, he has to hedge his bets to guard against a market reversal. So, he won't keep pace with a "straight up market."
Even investors who agree with that logic, however, can't exactly applaud his decision to invest in BioFuel. Shares of the ethanol producer have declined 69% since Einhorn revealed in a September 2012 SEC filing that he owned 36% of the company.
$BIOF longs get ready for a bloodbath-- steven sabo (@Stevenmiami) Apr. 1 at 06:15 AM
In his latest letter to shareholders, released Jan. 21, Einhorn also brings up a point that momentum chasers who jumped on the BioFuel bandwagon might want to take to heart: "Eventually, the market will remember that having a disruptive product that consumers would happily buy if sold near cost is not the same thing as having a valuable business."
Investors aren't even sure what David Einhorn wants with BioFuel. It's unclear whether he plans for the company to produce ethanol. It's also unclear whether the proposed real estate deal is to acquire land for crops or if he plans to turn it into a real estate venture.
Some cashtaggers are betting that Einhorn has real estate, not alternative fuels, on his mind.
$BIOF This is a way for Einhorn and company to take their real estate holding company public without jumping through all the hoops.-- Jim (@Kona) Mar. 31 at 06:39 PM
If they're right, investors betting on an alternative fuel resurgence led by Einhorn are buying into the wrong stock.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.