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After Recent 65% Drop In Stock Price, Green Mountain Now A Value Play

|Includes:Keurig Green Mountain Inc (GMCR)

Tim Biggam, TradingBlock (May 8, 2012, 3:20 pm CDT)

Symbol Analyst Target Price Target Date
GMCR 30.00 Sept. 21, 2012

Green Mountain Coffee Roasters, Inc. (ticker: GMCR) engages in the specialty coffee and coffee maker business. The company sources, produces, and sells approximately 200 varieties of coffee, cocoa, teas, and other beverages. The company also manufactures gourmet single-cup brewing systems and brewing equipment. It sells its products primarily in North America through supermarkets, club stores, and convenience stores; in restaurants and hospitality; and to office coffee distributors, as well as directly to consumers through its website.

How the mighty have fallen. GMCR, which we felt was a little too richly priced at the 75 level a few months back, has now fallen back 65% to 26.38. Their latest earnings announcement, which was focused on slowing growth going forward, was met with a punishing reaction by the market. What was missed, in my opinion, was the fact that GMCR actually made their numbers. The company tooled down growth prospects going forward from 50% to a more realistic 20%.

The stock, which had, been trading at over a 50 multiple, now sports a very reasonable 12 P/E, and only 10 on a forward basis. Some of the mauling was also due to forced liquidation by one of the CEOs, who had to sell 5 million shares to meet a margin call. With the news out of the way, I think the market will eventually focus on the fact that GMCR is now a GARP play, trading at a 10 P/E with a 20% growth rate.

I look for shares to move back to the post-earnings level of 30 by September expiration.

Play of the Day

Based on Green Mountain's (ticker: GMCR) current market price of $26.38 and using a target price of $30.00, a target date of September 21, 2012 and $1,000 of investment capital, below are three options strategies (ranked by potential profit) and a comparative stock trade to consider should the price target be achieved at the target date.

Click on the strategy name below to access trade details using TradeBuilder on Powered by TradingBlock's TradeBuilder.

Strategy (click for details) % Return at Target Probability of breaking
even or better
Buy Sep Put Butterfly +210% 56%
Buy Sep Call Spread +112% 61%
Sell Sep Put Spread +103% 63%
Buy Stock +13% 61%

* Click link to access TradeBuilder details on Must have Instant or Actual account. Subject to change due to changing market conditions. Click here to view risks regarding selling stock short.

DISCLAIMER: This content is provided for educational and informational purposes only. Evaluate any strategy prior to use to understand risk and suitability. TradingBlock does not endorse or warrant any Market Analyst content, service or product. Use this content at your own risk without guarantee or warranty of any kind from TradingBlock. Tim Biggam is a TradingBlock registered representative. He is not compensated by TradingBlock for any market research or analysis services. He currently does not hold any positions in GMCR.

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

Stocks: GMCR