Last year, Green Mountain Coffee Roasters (
GMCR
) was the golden boy of growth stocks before morphing into the
poster child for irrational exuberance: an exceptionally quick
10-bagger that lost 80% of its value between September 2011 and
July 2012. But with new admirers pushing up its share price more
than 30% in a month, what the heck is it now?
GMCR
data by
YCharts
On the one hand, Green Mountain now looks like a reasonably
priced growth stock. Revenues are up 37% in the past 12 months,
and profit growth has been nearly twice that. Its valuations,
which were running at a
PE ratio
of around 80 last summer, are down to a modest 14.
GMCR PE Ratio
data by
YCharts
On the other hand, Green Mountain still acts like a company
with trouble that it can't, or won't, completely explain. Its
share price has been rocked hard several times in the past 12
months by disturbing surprises, including a couple out of left
field. The question for today's potential investors: does
management have the product and the wherewithal to turn these
very nice paper numbers into commensurate shareholder gains?
GMCR Revenue TTM
data by
YCharts
On the ground, Green Mountain's biggest problem is the rising
competition for its Keurig products, the single serving coffee
machines and K-cup serving packs responsible for that beautiful
growth in the past. Key Keurig patents expire this month. In
April, the Securities and Exchange Commission
asked the company
to explain why it didn't explicitly designate these patent
expirations as potential threats to financials in previous
filings.
The company responded
that, in a nutshell, it didn't then think competition would hurt
because Green Mountain made such a fine product.
Shareholders, particularly those familiar with the effects of
expiring pharmaceutical patents, may find such ignorance
particularly alarming. They showed some concern in March, when
retail partner Starbucks (
SBUX
) announced plans to sell a competing single-cup brewer. Green
Mountain shares lost more than 20% from that bit of news.
GMCR
data by
YCharts
That next precipitous drop on the above chart came in May,
after the company reported unexpectedly low sales and slashed
sales projections without much explanation. The decline was
quickly exacerbated by top executives - then Chariman Robert P.
Stiller, mainly - who dumped their shares to cover their own
margin calls. (Aka, they had used their shares as collateral on
loans, and now that the shares are worth so much less, the
lenders want more cash.) Stiller lost his chairmanship for the
exercise but remains on the board and a big shareholder. Peter
Eavis of The
New York Times
explains well the continuing risk the situation brings
shareholders.
Short sellers are a constant problem for Green Mountain
shareholders. The company remains one of the most shorted stocks
trading, with shorts still holding some 30% of the company's
outstanding float at the end of August. By comparison, shorts
make up about 4.5% of Starbucks' float.
Optimism around Green Mountain now comes with the assumption
that the trouble responsible for Green Mountain's infamous
landslide is winding down. The shares' downhill race started this
time last year, one might recall, when short seller David Einhorn
presented a 110-slide Power Point at a conference questioning
everything good about Green Mountain, from its financials, to its
patents, to its worthiness of the title of best 5-year returns of
any S&P company. The company appeared to clear up one big
issue this month when it forecast positive free cash flow for
2013 -- for the first time in almost five years - which should
fund stock buybacks. Other balance sheet and accounting issues
are not yet resolved, but this announcement was enough to lead
one analyst to initiate a buy recommendation on the shares and
another to reiterate his own.
GMCR Free Cash Flow TTM
data by
YCharts
Calling this a turning point may be a bit premature. Since
Einhorn's revelations, Green Mountain shareholders have yet to go
four months without suffering some major jolt on bad news. Short
sellers remain poised to exaggerate any price movement, up or
down. Even if there's a turnaround in action here, waiting for a
little more evidence before joining it might be worth the peace
of mind.
Dee Gill is an editor for the
YCharts Pro Investor Service
which includes professional
stock charts
,
stock ratings
and
portfolio strategies
.