Green Mountain Coffee Roasters: Why Many Investors Fear This Market

Oct.24.11 | About: Keurig Green (GMCR)

During the 1990s, the individual investor had a fair amount of confidence in the stock market. Returns were good, there were a bunch of solid companies out there, and if you were lucky enough to get in earlier on some tech names and cash out before the crash, you felt pretty good. Then the tech bubble burst, and with it confidence fell faster than IRA accounts. Investor confidence was shattered. It took years for it to rebound a bit, but it eventually did. Then the financial crisis hit-- another crisis of confidence. But things rebounded again, and if you were lucky to buy Dollar Thrifty (NYSE:DTG) under $1, Apple (NASDAQ:AAPL) at $80, or Bank of America (NYSE:BAC) under $3, you made some good profits over the next year, assuming you got out on time. You still would have good profits in them if you haven't sold yet, but 2 of the 3 are well off their highs.

Then we come to May 6, 2010. The flash crash sent the Dow from down 300 points to down 1,000 in just minutes. Everyone on CNBC was in shock. Some brokerage account websites were down, or couldn't process trades. Individual investors-- and I'm not talking about professionals here-- became even more enraged with the market and confidence hit a new low.

I still know a lot of people that won't invest in the market because they think it is rigged, and sometimes it seems like it is. With all of the high speed trading, and computers spitting out complex algorithms, I sometimes wonder if I should get out of the game. But every time I make a good trade, I convince myself not to.

Why do I bring all of this up? Well there is an interesting case study from the past week I'd like to discuss. Green Mountain Coffee Roasters (NASDAQ:GMCR). The stock has had a crazy ride, and this is a perfect case study of why many people stay away from the market. Let's look at how this has unfolded.

Friday, October 14th:

GMCR closes at $92.09, implying a market cap of slightly over $14 billion.

Monday, October 17th:

9:30 AM: GMCR opens at $94.60, and touches a session high of $95 early on. As the markets start to turn lower, GMCR heads below $90 around 10:00 am. GMCR continues to trade in the upper $80s until about 11:45 AM.

11:53 AM: The Wall Street Journal publishes an article on GMCR. Hedge Fund Titan David Einhorn, speaking at the Value Investing Congress, has gone negative on the stock and is presenting on why he is short. By this time, the stock has dropped to nearly $82.

12:30 PM: After rebounding quickly to about $85, the stock starts heading lower. More reports are out about the Einhorn event. The stock touches a low of $79.33.

4:00 PM: Despite all the negative news, GMCR holds up and sheds some losses, closing the day at $82.50. The stock trades nearly 18 million shares, about 5-6 times what it has been averaging lately.

Tuesday, October 18th:

9:30 AM: The stock opens lower and declines further. Around 10 AM, it hits its low of the day of $78.71, lower than Monday's low. The stock bounces slightly and heads higher as the morning continues.

12:40 PM: As we reach the midday point of the market, the stock continues upward and hits its intraday high of $82.84. The stock declines from there. Volume is significantly less than Monday and volatility has eased.

4:00 PM: The stock closes at $82.11, down slightly for the day. Volume is only 6.7 million shares. At this point, the company has a market cap of about $12.57 billion.

Wednesday, October 19th:

9:30 AM: The stock opens at $81.19, down about a dollar. After a brief decline, the stock soon pops. GMCR hits a high of $84.78 around 10:15 AM, but will not see that level again.

10:56 AM: An article I wrote on this site is published about GMCR. I list a few reasons why I respectfully disagree with Mr. Einhorn's view of the stock. Despite a few agreements with my stance, the longs have gone into hiding and shorts are now in control. Most seem to agree with Einhorn. At this point, the stock is a little higher than $83.

11:59 AM: The Wall Street Journal publishes an article that contains the presentation that Einhorn made on Monday (all of his slides). As the afternoon continues, more outlets, including CNBC, make the presentation available. At this point, the stock is at $82.

12:20 PM: The Wall Street Journal reports that Green Mountain may increase its workforce in Vermont. We later find out that means about 400 jobs.

1:10 PM: The stock is at $81.75. All of a sudden, volume picks up, and the stock starts going lower, and fast. By 1:30 PM, it has broken below $80, and will lose $75 just 90 minutes later.

3:15 PM: Just a few minutes after Herb Greenberg mentions the stock's fall on CNBC, the stock hits a low point just above $71. It will rally for the next few minutes, but fall into the close.

4:00 PM: The stock breaks below $70 just before the close. GMCR closes at $69.80, barely off its low of $69.50. Volume nearly reaches 17 million shares again. The market cap is now $10.7 billion.

Thursday, October 20th:

9:30 AM: The stock, up about 75 cents just before the open (at $70.50), opens unchanged and heads lower. It breaks $68 just three minutes into trading and $66 five minutes later.

9:41 AM: $65 is gone, and we're falling fast. After a temporary low of $64.50, we bounce for a couple of minutes. We almost make it back to $66 before heading lower. Volume approaches 400,000 shares a minute. We've done more volume in 15 minutes than we did in entire days in August and September.

9:52 AM: The stock hits a low of $63.26. The market cap has dropped to under $9.7 billion. Over $4 billion lost in the past 72 hours. Just five minutes later, we're back to $65, and up to $67.75 by 10:15. The stock rises into the 11 AM hour.

11:21 AM: Back above $69. In just 90 minutes the stock has jumped $6 off its low. 15 minutes later, it is positive for the day.

11:46 AM: The stock hits a new intraday high of $71.87, up $8.61, or 13.61% from the low set just 2 hours ago. Profit taking takes it down to $70, where it will settle in for most of the afternoon. By 2:30, volume is at 19 million shares, and the stock is still completely flat on the day.

3:00 PM: The stock started to decline at about 2:40, and we're now back down to $68. Volume has increased a little but is still well off this morning's pace.

4:00 PM: The stock ends the day down $1.71 at $68.09. Volume ends up just over 24 million for the day.

Friday, October 21:

Friday for the most part was an uneventful day, until about 3:30 PM. The stock traded between $69 and $72 for most of the day, on volume that was about twice its daily average. However, at about 3:30, some big sell orders came in, and the stock tumbled from $69.30 to a low of $65.40. The stock bounced back and closed down just 24 cents to $67.85 on about 13 million shares. The final market cap for the week would turn out to be $10.4 billion.

Impact on the Individual Investor:

This is why some people just can't stand the market. If you have a normal job and you work during the week, you may not have access to the markets 100% of the time. You may just own a basket of stocks that you monitor, but you're not a trader. You come home from work and your stock is down $10. It holds up the next day so you think it's just an overreaction, right? Wrong. The next day, it drops another $10. You have one of two choices. You can hold and hope it goes back up, or you can sell, either taking a loss or losing a bit of profits.

But the bigger impact is on mutual funds and retirement accounts. Check out the top holders of the stock, as of a few months ago. The Fidelity Mid Cap Stock Fund (FMCSX) lists Green Mountain as its #1 overall holding. The Vanguard Mid Cap Index Fund (VIMSX) lists it as its #4. If the Fidelity Fund did not sell any shares in GMCR during September, at the end of that month 6% of the fund was in GMCR. Ouch. Being a hot growth stock, Green Mountain is in a lot of mutual funds. While hopefully some of these funds lightened their positions earlier in the week, they probably didn't sell out of their entire position. Even though most mutual funds that hold the stock have very small positions, it still is a troubling sign. And so one way or another, investors get hit, whether they owned the stock outright, or a mutual fund they own did. Either way, investor confidence is eroded once again.

GMCR's Industry Comparison:

Thanks to the recent drop, the Forward P/E on earnings for fiscal 2012 (ending in September) is now just 26. A week ago it was over 35. As a comparison, Starbucks (NASDAQ:SBUX) trades and 23 times next year's earnings. Remember though, Starbucks has 3 times the market cap and projected 2012 revenues as Green Mountain. Peet's Coffee and Tea (NASDAQ:PEET), a smaller competitor to GMCR, has a Forward P/E of 33.50. So after this drop Green Mountain may be fairly priced to its competition, if not undervalued.

Also remember that Green Mountain is growing a lot faster than the above two. Revenues are projected to grow 99% this year and 61% next year. Starbucks is looking at just 8.5% revenue growth this year and 10% growth next year. Peet's is looking for 11% and 9%, respectively. So this multiple you are paying may not be too bad if the growth is there. If you look at price/sales, based on next year's expected revenues, GMCR is at 2.38, SBUX at 2.45, and PEET at 1.91.

Remember too that analysts love the stock. They can be wrong, but they currently average a $120 price target on the stock. We're currently under $68 . A few analysts even came out and recommended the stock as a buy this week, saying the Einhorn fears were overblown and possibly even wrong.

My Prediction:

This company has certainly re-priced itself in the last few days. We saw a short squeeze once the stock bounced off its lows, so if the stock gets back to $75 in the next week we may find $80 before earnings. If you want to play earnings, be careful. I expect a good quarter and guidance, but if any accounting issues come out, this stock will plummet. If you decide to have a position going into earnings, you may want to purchase options in case you are on the wrong side of the trade. The cost of this protection will depend on how much the stock settles down in the next few days. This is a good long term buy as long as the company does not have major accounting issues come out. Now, you could say that with almost any company, but the fears are a little higher with this one. GMCR is a great case in why many people fear the stock market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.