4 Reasons to Sell Green Mountain Coffee Roasters: A Preview
January 31, 2012 Leave a comment
Over the last year or so, Green Mountain Coffee Roasters (“GMCR”) has been described by some commentators as a “battleground stock”. This characterization suggests that the case for owning the stock and the case for selling the stock are equally valid. I believe this is quite false. Among the critics, you find an All-Star cast of Accounting/Fraud experts, including David Einhorn/Greenlight Capital, Sam Antar, Ed Ketz/Anthony Catanach, Howard Schilit/CFRA, and others (“the crime fighters”). The motto of these crime fighters seems to be “the truth shall set you free.” The supporters, on the other hand, include a dodgy cast of Wall Street analysts and investment firms, whose raison d’être seem to be “As long as the music is playing, you’ve got to get up and dance” and “The ends justify the means.”
While the crime fighters have provided more than enough compelling reasons to sell the stock (which I summarize below), I have actually uncovered 4 additional reasons, 2-3 that may act as powerful near-term catalysts to sell. Suffice it to say, I believe GMCR is a “ticking time bomb”, and that those who own the stock for longer than 1 day are dangerously playing with fire. I believe GMCR’s stock is worth no more than $15/share, and likely much less, in the single digits. So you’re risking 72%-90% downside (from today’s closing price of $53.04) for whatever upside the market and luck afford you. A positive (fudged) earnings report this week (or hope leading up to earnings) would be the perfect opportunity to unload.
I summarize my case for selling GMCR below and elaborate in much greater detail in a separate report. For more details on this report, please e-mail me at email@example.com .
A Summary of the Crime Fighters’ Concerns:
(1) Accounting/Fraud Issues: Materially Overstating Revenue, Understating Operating Expenses, Capitalizing Operating Expenses, Channel Stuffing, etc. all to meet Wall Street Estimates
(2) Improper Conduct/Violation of Laws: Violations of Regulation FD, Insider Trading, Securities Fraud, Peculiar relationship with quasi-captive distributor, etc.
(3) Fundamental Problems: Virtually ZERO cash flow since Keurig Acquisition, 100% dependent on external capital, Abysmal earnings quality, reliance on acquisitions to meet/beat expectations, Reduced/changing transparency of operating metrics, Patent expiration, etc.
(4) Other: Insider selling, ignoring critics, unhealthy hubris, etc.
A Preview of the 4 Additional Reasons to Sell:
(1) You Cannot Trust GMCR Senior Executives; Shareholders May Want One to Leave – They have lied and misrespresented; at least one may be in violation of various professional codes of conduct, not to mention, the Law, both in letter and spirit. Senior executives of other companies in the past have resigned for similar offenses, so it raises the question: why shouldn’t this executive resign as well? Why does this executive get to be treated by different standards than other executives, or other employees? Don’t shareholders have a right to know and decide? Once you cannot trust the judgment of the executives, can you trust any of the Company’s claims?
(2) The Razor-Razor Blade Myth is Already Showing Cracks – There are 3-4 under-appreciated and accelerating consumer trends that are already eroding and fundamentally threaten the claimed: “Razor, Razor Blade Model”. Ground-level field research, a McKinsey/BCG/Bain-esque analysis, and plain ‘ol common sense all lead to the same conclusion. The irony here is that GMCR can easily end up a financial failure and/or achieve my price targets even while the brewers remain popular. Remember Blackberry, Research In Motion? Did you know their stock peaked 3-4 years before revenue and earnings did?
(3) Orange Jumpsuit Mountain Roasters Risk – if it looks like a duck, walks like a duck, and quacks like a duck, it must be a…orange jump-suit. In the same way that Harry Markopoulos used a combination of observations (some utilizing statistics/math), to conclude that certain facts were “too good to be true”…you see similar here. There seems to be more going on than the crime fighters have suggested, if you weave together various objective observations coupled with credible motives/incentives.
(4) GMCR the PIIG – The Sovereign PIIGS of Europe have liquidity and solvency issues, and the markets have (rightfully) punished them accordingly, by demanding high yields, sometimes absurdly so (see Greece). GMCR is actually very similar to the PIIGS, financially speaking. In fact, GMCR is most similar to Greece, a “cheat’s charter” as described by Hugh Hendry. Yet the strange, very strange, absurdity is that the capital markets have treated GMCR as if it were Germany (I have a few evidence-based theories that explain how this was possible; granted, if Greece could fool Europe for over a decade, I’m sure it doesn’t require too much of a leap of imagination here) . I have good reason to believe that this charade is coming to an end, and that GMCR will be properly recognized as a Greece, NOT Germany.