How To Play The Green Mountain Coffee Roasters Earnings Announcement

Terry Allen profile picture
Terry Allen

Green Mountain Coffee Roasters (NASDAQ:GMCR) announces earnings after the close on Wednesday, May 8, 2013. If history is any indication, the stock is likely to make a huge move, one way or the other. Over the last four quarters, the average price change after earnings was a whopping 26.1% (measured from the closing price on the day before the announcement until the closing price when the Weekly options expired on Friday).

Here is what has happened after the past four earnings announcements:

(Click to enlarge)

While GMCR has met or exceeded expectations for all four previous quarters, the market has clobbered the stock when it only met the earnings expectation (possibly fueled by claims that they had cooked the books to make those numbers). The average change over the past four quarters has been 26.1%, skewed by the huge 49.3% drop one year ago. Even discounting that quarter, the average change has been 18.4%.

It is no surprise that current option prices are predicting a move of 14.5%. This "low" expectation (by historical standards) is perhaps an indication that the company is settling down and a little more mature today than it has been in the recent past. Still, fireworks of some sort can be expected. A 14.5% change in a day or two is still a huge move in the general scheme of things.

There are two issues that need to be addressed - first, how will the company do compared to expectations (analysts say earnings will be $.72 while whisper numbers are $.78), and second, what is the stock likely to do after those earnings are announced? Historically, the two results have had very little relationship between them (in half the quarters, meeting or beating expectations resulted in a lower stock price, for example).

Three months ago, just prior

This article was written by

Terry Allen profile picture
Publisher of options newsletter since 2001.. Thirty years experience trading options virtually every day. including stint as seat holder and market maker on the C.B.O.E. MBA from Harvard Business School and DBA from Univ. of Virginia Darden School. Author of Making 36%: Duffer's Guide to Breaking Par in the Market Every Year, In Good Years and Bad (4th revision - 2012) and Coffee Can Investing: A Better Idea Than Mutual Funds in an IRA or 401(K), 2014. is a newsletter that carries out eight different option portfolios which many subscribers mirror on their own or through auto-trade at several brokers who make all the same trades in individual customer accounts. Each portfolio offers something different (bullish, neutral, or bearish),and different underlyings (GOOG, SPY, SVXY, and other individual companies). In 2005, the S.E.C. brought an action against Dr. Terry Allen, claiming that he was managing money for people without being a registered investment advisor because of the auto-trade service offered by several brokers who placed trades in their customer accounts based on Terry’s Tips newsletter recommendations. A second complaint was for a single statement on his website that they believed was incorrect and therefore fraudulent. Although two large law firms assured Dr. Allen that if he went to court on the first issue, he would win because there was a Supreme Court decision stating that investment newsletters are exempt from registration requirements - it would be a violation of their First Amendment rights. However, they estimated that his legal expenses would be greater than settling with the S.E.C. (and a year or two of his time tied up in court proceedings), and both firms recommended that he accept the settlement offer while not admitting any guilt. The second issue (fraud) involved a single statement that was true when it was written but a couple of years later, option prices fell to 10-year lows, and it was no longer true. The S.E.C. argued that the statement was not removed from the website in a timely enough fashion. For the past eight years since the settlement with the S.E.C., Dr. Allen has have been publishing the Terry’s Tips newsletter (and recommendations are executed in customer accounts at thinkorswim by TD Ameritrade through their Auto-Trade program), and the S.E.C. has not objected to any of his activities.

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