Turnaround stocks are immensely popular with investors for two
The first is that most people have a natural affinity to root for
an underdog. The second and more important reason is that these
stocks have the ability to produce outsized, market-beatinggains
Netflix (Nasdaq: NFLX)
, for example. The company's share price was crushed at the end
of 2011, falling nearly 79% to a multi-year low of $54 in the
fall of 2012. But Netflix was quick to react to concerns about
itsearnings power . The result was phenomenal, withshares surging
more than 140% in just the past six months. Take a look at
But if you missed those big gains in Netflix, don't worry --
because history could soon be repeating itself.
Much like Netflix,
Green Mountain Coffee Roasters (Nasdaq: GMCR)
was a high-flier gone horribly wrong. After skyrocketing more
than 2,000% from October 2008 to September 2011, shares proceeded
to lose more than 80%, crashing to below $20 in the following 12
The plunge was driven by concerns related to the company's
expiringpatents on its popular Keurig coffee-brewing machine and
K-Cup single-brew packets. But a little more than ayear after the
big crash, those concerns are now looking misplaced, with Green
Mountain aggressively defending its product andmarket position.
The biggest threat to the Keurig was expected to come from
Starbucks (Nasdaq: SBUX)
with the introduction of its Verismo home-brewing machine.
However, the Verismo has had little effect on the Keurig'ssales
In the fourth quarter of 2012, Green Mountain sold 4.95 million
Keurig machines, up 18% from last year, while Starbucks reported
sales of just 150,000 Verismo machines. Green Mountain's results
are being driven by the company's continued emphasis on product
enhancements, strategic partnerships and discounted models to
reach a wider audience.
Green Mountain has also been focused on defending its leading
position in the highly profitable K-Cup market. To combat the
threat of competition from new vendors, Green Mountain has
entered strategic partnerships with competitors such as
Starbucks, Dunkin' Donuts parent
Dunkin' Brands (Nasdaq: DNKN)
and Eight O'Clock Coffee tooffer their signature drinks through
K-Cups and Vue packs.
In January, Green Mountain became the exclusive manufacturer of
Costco's (Nasdaq: COST)
Kirkland Signature brand K-Cup packs for the Keurig system. In
March, Green Mountain inked a deal with
to distribute Lipton's products in K-Cup and Vue packs. Green
Mountain also has a deal with
Dr Pepper Snapple Group (
to sell its iced-tea products in K-Cups and Vue packs this
When you add together these strategic partnerships, it's
obvious that Green Mountain is positioned not only to defend its
leading status, but to extend it.
However, Green Mountain isn't focused exclusively onrevenue . The
company is also committed to expanding its margins and has said
itwill reduce its workforce by 2% this May. Green Mountain is
also working closely with coffee farmers to expand crop yields
with a soil-enhancement technique using biochar, a special type
of charcoal that the company says will boostearnings this year.
Analysts are expecting earnings growth of 14% in 2014 and annual
earnings growth of 20% in the next five years. That has shares of
Green Mountain trading with a forward price-to-earnings (P/E )
ratio of just 19, a sharp discount to its 10-year average of 31.
Risks to Consider:
Shares of Green Mountain have already been rallying from the
good news, up a market-beating 26% in 2013. Even though the
valuation looks great, thoseshort-term gains could trigger
profit-taking and pressure shares.
Action to Take -->
Green Mountain was an epic high-flier before its fall from grace.
But the company is rebounding aggressively to increase itsmarket
share . Green Mountain is also facing less competitive pressure
on its home-brewing products than expected. If the company traded
with its average forward P/E of 31 in the past 10 years, shares
would jump 63% from current levels to $88.
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