Green Mountain Coffee Roasters (NASDAQ:GMCR) reported earnings yesterday evening that largely missed expectations, and as the old Wall Street saying goes, “they took the stock out in the alley and shot it!”
GMCR, which closed on Wednesday at $49.52 a share, gapped down on the open this morning to $29.52, a whopping decline of over 40%!
Green Mountain missed the earnings range forecast of $2.55 to $2.65 per share, cutting its 2012 guidance down to $2.40 to $2.50 per share. This was mostly due to a slowdown in demand for K-Cup packs and Keurig coffee brewers.
Such stock price slaughters are often unpredictable, but in this case, as InvestorPlace‘s Tom Taulli pointed out, it was clearly signaled way in advance by a recent heavy increase in shorts, as well as intensified competition in the single-cup brewing market. There was also another key giveaway.
At the end of March, I had written about the extensive degree of insider selling at GMCR, which is often a signal that insiders are expecting a large decline in the stock price. To review those transactions, Chairman and founder Robert P. Stiller sold $66.3 million worth of Green Mountain in February, only a few short weeks before the stock plunged from near $70 to $50 in only six trading days.
Stiller sold 500,000 shares on Feb. 15 at $65.94 and another 500,000 shares on Feb. 24 at $66.68 per share. But he wasn’t alone. Company directors William D. Davis and Jules A. Del Vecchio also sold close to $5 million worth of stock combined during the last week of February.
At the time, I pointed out that when one insider sells shares of stock, it doesn’t always mean the stock is poised for a fall. The insider may need money for some personal use. It’s also a recent trend for companies to pay lower salaries to executives, while giving them more shares of stock at reduced prices. So, we sometimes see insiders sell shares simply to increase their annual income.
However, when several insiders are selling around the same time period, or when large-scale selling is going on, as was the case here, it’s usually “caveat investor.”
On the day my story appeared, the stock opened at $52.35. However, over the next eight days it fell to a low of $41.02. Since then, the stock regrouped and hit an intra-day high of $50.05 during yesterday’s trading, just below its 50-day moving average.
Click to Enlarge
Courtesy of stockcharts.com
The accompanying chart is something you won’t see very often. Look closely at the lower right-hand corner — it looks like the stock just fell off a cliff!
The crush began as soon as the after-hours earnings fiasco hit the street yesterday. As I write this, the stock is just over $25. So, the Green Mountain price tumble is a perfect lesson for why investors should always follow insider transactions to see which companies are signaling large moves up or down in the coming months.
When considering a stock purchase, you can track insider buys and sales at financial websites such as Yahoo Finance. You can also create news alerts for your stocks at Google, so that when large insider sales occur, you can take action, such as selling your shares, buying puts for protection or simply tightening your stops.
As of this writing, Ethan Roberts doesn’t own any shares mentioned here.
