Short Keurig Green Mountain Into the Ground (GMCR)

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I often feel like a fool for not jumping on the bandwagon of momentum stocks. For the longest time, Keurig Green Mountain (GMCR) was one heck of a momentum stock. Although some of the momentum was justified because the company was growing EPS at a terrific clip, eventually that growth stumbled a bit.

gmcr-stockThat’s what always scares me about momentum stocks. At any moment, the momentum could go away and there’s a huge selloff. GMCR has seen that happen … twice, in fact.

Now the company is trading on fundamentals, and I can sink my teeth into it for analysis that may actually mean something. And what I see is bad, from a fundamental standpoint.

Actually, it’s downright awful, and here are all the reasons why.

GMCR Stock Has Nowhere to Go but Down

GMCR has run into numerous problems. Its signature K-Cup revolutionized how coffee is made at home. However, GMCR had the same ultimate problem that pharamaceutical companies do — when the technology’s patent expires, anyone can produce K-Cups — and they do.

Of course, GMCR still had a base that continues to use the K-Cups, but now they suffer from an image problem. The little pods are not environmentally friendly, and in today’s ultra-PC environment, that’s a sin. GMCR won’t achieve their goal of making K-Cups recyclable for another five years. That’s an eternity.

So GMCR has competition and a PR nightmare. Then it tried to launch its new coffee product … which flopped for the very reason GMCR ended up in the position of having to create a new product in the first place. You see, the product required GMCR-licensed packs to brew the product. You couldn’t use a third-party product like you could with the original model.

So GMCR is launching a new product: Keurig Kold, a machine that makes cold carbonated beverages in 90 seconds.

Why?

Apparently, GMCR didn’t get the memo that SodaStream (SODA) has been flailing on a global scale with the exact same concept. As I’ve been saying for years, homecrafted sodas were a fad. It sounds neat to make your own soda at home … at first. However, I always insisted (correctly, it seems) that, while a small core group of users would use it all the time, most would abandon usage.

It’s just more expensive to make sodas them at home than it is to pick up some at your grocery store, where you get an infinite variety of flavors, in all manner of serving sizes, for pennies per serving.

Can someone explain why GMCR thinks it can sell these things at $369 when Sodastream had to mark theirs down to $80? Not only that, Sodastream has effectively given up on the soda market because people are moving away from sugary carbonated drinks. Have you seen earnings lately for Coca-Cola (KO)?

Fail.

Given that the stock is down 66% from its high, one can certainly argue that initiating a short position now is coming late to the game. That may be true, but what I see is limited upside to GMCR stock. Earnings per share are projected to decline 13% to $3.42 this year, and analysts have put a crazy 14% annualized growth rate on the stock going forward.

If the EPS estimate for this year is correct, GMCR stock will earn about $520 million in profit, meaning it trades for about 16x earnings. Free cash flow is only $50 million over the trailing 12 months. The last set of insider trades occurred in the high-$90 range in May of this year, yet there has been nothing since.

I’m not paying 16x for a company with a future as uncertain as this, and there’s enough disaster looming in the future for me to short.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. Lawrence Meyers has no position in any company, however he may initiate a short position in GMCR stock in the next 30 days. Lawrence has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. He can be reached at TheLibertyPortfolio@gmail.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/gmcr-stock-short-into-ground/.

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