Monday, November 25, 2013

Why Most Investors Missed Out on Green Mountain Coffee's 150% Turnaround

Nestled among the Green Mountains of Vermont, Wyatt Investment Research

 

Monday, November 25, 2013

 

 

Why Most Investors Missed Out on Green Mountain Coffee's 150% Turnaround
by Chris Preston

 

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Nestled among the Green Mountains of Vermont, Wyatt Investment Research headquarters aren't exactly in the middle of the action on Wall Street. But it is within 15 miles of one of the stock market's best comeback stories in 2013.

 

Green Mountain Coffee Roasters (NASDAQ: GMCR) is one of Vermont's largest employers. Founded in 1980 by Bob Stiller, Green Mountain's sprawling main campus is centered in tiny Waterbury, Vt. Six years ago the company opened an 87,000-square foot facility in Essex, Vt.

 

The specialty coffee maker is renowned for its K-Cup, single-serve packs and accompanying Keurig brewing machines. With a 90% share, Green Mountain dominates the single-serve coffee market.

 

This time a year ago, however, things weren't looking so great for the Vermont-based company.

 

The stock had been pummeled for the better part of a year following a scathing report from renowned hedge fund manager David Einhorn at the 2011 Value Investing Congress. Einhorn announced he was short-selling GMCR based on a number of factors, including an ongoing SEC inquiry into the company's accounting practices and the impending patent expiration on the company's signature K-Cups.

 

Einhorn's blistering presentation and a subsequent string of disappointing earnings sent the stock into a tailspin. From September 2011 to July 2012, Green Mountain shares fell from an all-time high of $108 to a multi-year low of $17.57. With the K-Cup patent expiration coming in September 2012, things were suddenly looking bleak for GMCR.

 

Then a funny thing happened. The patent expiration had little effect on Green Mountain's single-serve market share. Earnings per share have grown 39% in the last year, increasing year over year for 12 consecutive quarters. Since 2011, EPS has increased 141%.

 

Meanwhile, the SEC inquiry into the company's accounting practices - though still ongoing - has yet to uncover anything unseemly.

 

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Since the Einhorn debacle, GMCR has weathered the storm. Shares have risen 150% in the last year, topping out at $89 in late August before a recent pullback. The company's market cap has more than doubled in the last year, from $4 billion to over $10 billion.

 

What's more is that GMCR's run doesn't appear over yet. The company is increasing profits at such a rapid pace that the share price isn't overly expensive despite the huge rally. At roughly $69, the stock is trading at less than 16 times forward earnings.

 

Furthermore, Wall Street loves the stock. The average analyst target price is $93, or 36% higher than the current price. At least one analyst thinks the stock could rise as high as $120. Even the low target is $75, still a 9% premium to GMCR's current share price.

 

Green Mountain Coffee is riding so high these days that even Einhorn can't knock it down. The hedge funder was at it again on CNBC yesterday, maintaining his stance that GMCR cooks the books and claiming their business model is dying. Two years ago, such fighting words from Einhorn were essentially a death sentence for GMCR shares. Today, the stock seems impervious. Even while Einhorn was bashing the company again on national television yesterday, shares shot up a whopping 14%.

 

Green Mountain Coffee's comeback story is a familiar one on Wall Street. Strong company gets beaten down by bad publicity, company's stock plummets to the point of being grossly undervalued, stock stages dramatic recovery as investors realize that its business fundamentals haven't changed.

 

Nothing really changed about Green Mountain Coffee Roasters other than its perception. After a year of repairing the damage, the stock is again a Wall Street darling.

 

It's an investment lesson we regularly preach here at Wyatt Research: buy bad news. When a good company gets beaten down by bad publicity, that's the best time to buy it. We saw a similar comeback with Netflix (NASDAQ: NFLX) after its CEO made a series of boneheaded decisions. And we saw it with Facebook (NASDAQ: FB) once the stench of the company's botched IPO finally subsided.

 

Green Mountain Coffee Roasters is just the latest example of why it pays to buy bad news.

 

Good investing,

 

Chris Preston

Richmond, Vermont

 

 

 

Further Reading:

 

"Earnings season can be particularly stressful for investors since the announcement event is often a catalyst for share price movement. And let's face it, these movements aren't always to the upside. For small caps and growth stocks in particular, earnings announcements often send shares jumping around like beach balls." Read more here: Use Earnings Volatility to Buy 100% Winners

 

"When the opportunity arose to add Icahn Enterprises LP (NYSE: IEP) to the High Yield Wealth portfolio in July, I pounced like Michael Moore on an unattended Burger King Triple Whopper with cheese." Read more here: Icahn enterprises: An Income Investor's Best Friend

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