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Green Mountain Coffee (GMCR) is on the rise -- but don't expect the trend to last. The Keurig cup (K-Cup) manufacturer is 37% short in spite of the fact that it is currently up 37.3% year to date, and recently hit a new 52-week high. Most analysts are saying that the coffee company is a buy, but I don't think so. Green Mountain carries a mean one-year target estimate of $55.20, and I think even this may be too high.

I say avoid this stock - but for the less risk-averse, I think a short position is a good play.

At the risk of sounding like Greenlight fund manager David Einhorn, who bashed Green Mountain at the Value Investing Congress last year (as well as the year before that), and ultimately took a loss on his short position with the company, I think Green Mountain is bound to fall - the only question is when.

Right now, Green Mountain Coffee has a couple positives going for it - companies rarely rise over 37% in a year without having at least a few things in their favor. In this case, the company has improved its earnings per share over the past two years and it currently has a lower debt-to-equity ratio than many others in its industry. Green Mountain's net operating cash flow has also increased significantly compared with the same quarter last year. However, expanding profit margins, growth in earnings per share and cash flow from operations aside, there are still solid reasons to be skeptical about Green Mountain, if not downright bearish.

Green Mountain Coffee's product offering is in such a narrow niche and serves such a small subset of the population that Green Mountain could see some dramatic shifts as trends change. A minor change in market trends could see Green Mountain Coffee come tumbling down - and that is a big risk given the nature of the company's business.

Recently, Green Mountain has been trying to distinguish itself through an initiative toward Fair Trade coffees. In fact, the company was one of the first roasters to offer Fair Trade coffee back in 2000 and, for the past two years, the company has been named the world's largest purchaser of Fair Trade Certified coffee. And, according to its annual report [pdf], 25% of Green Mountain's coffee purchases made in fiscal 2012 were Fair Trade.

It makes sense - Fair Trade coffee tends to cost a little more (certified fair trade coffee adds a premium of $0.15 per pound), but people are generally willing to pay a little more for the product.

However, while Green Mountain has made assurances that the price of its coffees will not change as it converts several of its coffee to Fair Trade sources; there is bound to be an effect on the company's cost of doing business - and there isn't a whole lot of pie left.

Green Mountain recently announced a small workforce reduction, saying that it is working on enhancing efficiency in manufacturing and logistics across its nine K-Cup and Vue production facilities in North America. Perhaps the efforts are intended to help the company improve profit margins?

Green Mountain Coffee has a really weak net profit margin. At 8.03%, it trails its industry's average. In comparison, the company has a gross profit margin of 35.40% - the combination suggests that Green Mountain's products have a lower cost to make but have higher costs for marketing and administration. It also means that the company doesn't have much wiggle room in navigating coffee sources nor in dealing with competitors, like Starbucks (SBUX) Verismo, which allows users to brew both coffee and espresso drinks whereas Keurig machines only make coffee, tea and cocoa drinks - let alone affording to keep up with Fair Trade prices.

I think Green Mountain will continue to rise a little -- if for no other reason than momentum - but I doubt the increase will be enough to make buying in at this point worth it. The company has been holding its own as of late but there really is no reason to think that trend will continue. The market for Green Mountain's products is not expanding - it is fairly saturated. The company hasn't launched a new product to entice higher consumption from existing users or pull new customers from the competition.

No... this is a company that is moving from momentum.

I say short the stock. Green Mountain is like a hot potato - it gets passed around and momentum grows, until it just gets dropped.

Source: Don't Get Burned On Green Mountain Coffee