CONN’S, Inc. (CONN): Where Did David Einhorn and Christian Leone Get it Wrong?

As markets have been inching down on Tuesday, a particular stock took a pretty hard hit. After releasing its financial results for the third quarter, CONN’S, Inc. (NASDAQ:CONN)‘s stock slid by 41% in intraday trading, making the company the top loser on Tuesday. As investors have been unloading shares, the trading volume amounting to more than 6.1 million shares, which is almost 6 times more than the average volume, several investors who have been holding big positions in the company are more affected by the decline than others. So let’s take a look at some of the investors that have been bullish on the stock so far, and see where they got it wrong.

Greenlight Capital

However, before we get to that, let’s see why CONN’S, Inc. (NASDAQ:CONN) stock fell today. The company reported its financial results for the third quarter and posted a 19% increase in revenues on the year to $370.1 million. Both furniture and matress segment and appliances’ sales went up by around 37% and 25% on the year, while retail gross margin grew 50 basis points to 40.6%. However, on the earnings side, the company reported a loss of $0.08 per share, versus $0.66 per share a year ago. The decline in profits came on the back of additional provisions for credit losses. Analysts expected earnings of around $0.68 per share on revenues of $377 million.

Two of the top shareholders of CONN’S, Inc. (NASDAQ:CONN) are Christian Leone‘s Luxor Capital Group and David Einhorn‘s Greenlight Capital. Luxor has raised its stake by more than 150% during the third quarter to 7.59 million shares. At the end of September, Luxor acquired some 1.95 million shares and changed the nature of its stake to activist, even though the fund has not disclosed any plans regarding the company. The fund initiated a stake at the beginning of March, initially holding 2.0 million shares, while the stock declined by around 42% since then.

More interesting is the case of Greenlight Capital. The fund also added the company to its equity portfolio during the first quarter, initially holding 3.30 million shares, the company representing one of the fund’s top small-cap picks. Over the following quarters, Greenlight raised its exposure to the company as the stock has been sliding. In its latest 13F filing, the investor disclosed holding around 3.56 million shares, the position amassing 1.50% of its total equity portfolio. Moreover, in his letter to Greenlight’s investors for the first quarter of 2014, Mr. Einhorn explained why he likes CONN’s.

Mr. Einhorn has been well aware of the company’s credit portfolio problems. In the letter, the investor mentioned that the company has had increased credit losses and reduced earnings guidance for the fourth quarter, while its comparable store sales went up by 33% on the year. Even though the stock has declined severely on the back of credit risk problems at the beginning of the year, Mr. Einhorn said that CONN’S, Inc. (NASDAQ:CONN) still has a chance to recover as the company is a retailer with “15-20% unit growth and current double digit comparable store sales growth.” Moreover, the manager of Greenlight added that the market simply overreacted on “moderately bad news.”

Overall, as our data shows, among more than 700 funds that we track, 22 funds reported long positions in CONN’S, Inc. (NASDAQ:CONN) at the end of September, down from 24 funds in the previous quarter. These funds hold around $490 million worth of stock, down by $57 million on the quarter.

So, what does the future holds for CONN’S, Inc. (NASDAQ:CONN)? The company has already announced that its Chief Financial Officer Brian Taylor will step down and the company intends to address its credit-financing business problems by adding a Chief Risk Officer position and creating a credit risk and compliance committee. Moreover, we may see activist investors such as Mr. Einhorn and Mr. Leone stepping up and coming up with some measures to help the company improve its situation.

Disclosure: none