How the Shorts Figured Out Green Mountain

by Tom Taulli | May 2, 2012 6:27 pm

Shares of Green Mountain Coffee Roasters (NASDAQ:GMCR[1]) were getting roasted in after-market trading Wednesday. The company cut back its 2012 earnings guidance to $2.40 to $2.50 per share, down from a prior forecast of $2.55 to $2.65. The culprit: a slowdown in demand for K-Cup packs and Keurig coffee brewers.

Even though the stock already had plunged from $111 in September to Wednesday’s close at $49.52, short sellers definitely saw much more downside potential, and the percentage of short sales to the float reached a scary 23% last month.

So what were some of the warning signs short sellers saw that others didn’t? Let’s take a look:

Competition: It has been brewing. Of course, the biggest threat is Starbucks (NASDAQ:SBUX[2]), which now has developed the single-serving Verismo coffee machine. With the company’s extensive footprint and brand, this is a major threat to Green Mountain. Not to mention, other rivals have been ramping up their efforts, too, including Nestle (PINK:NSRGY[3]), which has single-serve coffee products like Nespresso and Nescafe Dolce Gusto.

Market Potential: When large companies enter a market segment, it’s often a sign that it is reaching a level of maturity. This might be the case with Starbucks and its attack on Green Mountain and the Keurig. No doubt, GMCR has done an amazing job in capitalizing on the single-serve brewer opportunity; from 2008 to 2011, sales skyrocketed from $500 million to $2.6 billion. But how much room is left?

Insider Selling: Green Mountain founder and chairman Robert P. Stiller sold $66.3 million of his holdings[4] in February — just weeks before Starbucks’ Verismo announcement and a weeklong sell-off that sent GMCR from $70 to $50. He wasn’t the only one — Green Mountain directors William D. Davis and Jules A. Del Vecchio unloaded $5 million of their holdings, too. That was a big red flag.

David Einhorn: Einhorn, who famously said Lehman Brothers was toast months before it collapsed, is one of Wall Street’s best short sellers. Einhorn is known for his incredible analytical skills, and he also does calls with suppliers and third parties to back up his research. In October 2011, Einhorn started to build a short position in Green Mountain on the belief that the company’s accounting was too aggressive[5] — not a good sign for GMCR.

The takeaway? Nothing is guaranteed in investing, but in Green Mountain’s case, several major red flags were in plain view. And as seen with today’s after-market stock action, the consequences of ignoring those warnings can be brutal.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”[6], “All About Short Selling”[7] and “All About Commodities.”[8] Follow him on Twitter at @ttaulli[9] or reach him via email[10]. As of this writing, he did not own a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2012/05/shorts-hit-the-jackpot-on-green-mountain/

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