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Green Mountain Coffee Roaster: Transfer of Wealth?

|Includes: Keurig Green Mountain Inc (GMCR)

Green Mountain Coffee Roaster (NASDAQ:GMCR), a stock with over 44% or 9 million shares short interest was squeezed after an outstanding quarterly earning report. The stock has rise from the low 50s to high 70s in a matter of days for a whopping 50% return.

Looking at the fundamental of the stock does not reveal it deserve this kind of valuation. The stock is currently trading at a PE ratio of more than 45x (excluding one time Kraft Patent settlement) of FY 2009 EPS and a book value of $6. For a comparison, Starbucks trades at 16x and many still consider it a growth company with its expansion to Asia. The Wal-Mart distribution news is definitely good news for the company but it remain to see how much revenue it can bring to the table and maintain the kind of growth implied in the valuation. On the other hand, this business is easily replicable and can face heavy competition from Starbucks or Dunkin' Donuts if it really takes off which will lower margin and revenue.

One thing for sure and is screaming from inside the company. Company insiders are exiting in joy. In the month of April, looking at Yahoo insider transactions, many insiders were selling aggressively. Some sold majority of their stake and cashed in millions worth of dollars. For the last 6 months, insider sold total shares of 944k and institution investors sold 2.85 million shares. As clearly seen from these transactions, these insiders are disagreeing with the market about the valuation of their own firm.

I believe the last two days saw the last wave of short covering with dramatic volume increase. This is a game of musical chair, when the music stops, the stock falls back to the reality.

Disclosure: Short GMCR.