This Stock May Be Red Hot but It’s Not a “Buy”
Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR) is one of the hotter stocks in the market right now. In fact, the stock is up 178% since the start of the year.
But if you know what’s good for you, you’ll steer clear. Green Mountain has shot up so high, so quickly that it has become a victim of its own success.
Green Mountain started with a single café that roasted beans and sold coffee over the counter to customers in a small town in Vermont. Today, that same company is generating $2.3 billion of revenue.
To put that in perspective, Green Mountain has delivered double-digit net sales growth for the last 27 consecutive quarters. And, since the acquisition of Keurig, it has seen net sales growth of more than 39% for 12 consecutive quarters.
But while compounded growth is the key to long-term success, it also can become a drag on near-term profits.
Often a company feels it must continue to grow simply for growth’s sake. And if that’s the route Green Mountain takes, then it will find itself in the exact same place Starbucks Corp. (Nasdaq: SBUX) did a couple of years ago.
Indeed, Green Mountain has put so much emphasis on growth that high expectations could negatively impact the company’s execution.
And in the economic reality of today, a company that has fixated on hitting lofty growth objectives could be setting itself up for a serious market disappointment.
So Green Mountain Coffee Roasters is “hold” – at least until global growth starts to rebound (**).
As I said, Green Mountain Coffee Roasters has enjoyed such spectacular growth that the market built in expectations that are no longer congruent with economic reality.
Currently, the stock carries a price/earnings (P/E) ratio of 89.28, so it’s more than a little overvalued.
Look at it this way: Green Mountain stock on Friday closed at $92.09. Yet the company earned just 60 cents per share in its 2010 fiscal year. That means it would take about 86 years of stock ownership just to pay the off the cost of a single share.
The consensus forecast is for Green Mountain to make $1.66 for its 2011 fiscal year. Even then, it would still take 55 years of stock ownership to pay the cost of a single share. By fiscal 2012 the measure will still only be down to 35 years.
The Standard & Poor’s 500 Index, with a forward estimated earnings ratio of 15-to-1 on the high end, is significantly cheaper than GMCR.
Also consider this: The S&P 500 has dropped in each of the last five months. So it is clearly pricing in a slowdown or a double-dip recession for the U.S. economy. But Green Mountain stock just set a new 52-week high of $115.98 on Sept. 20.
Essentially, this stock is barreling upwards, even as the outlook for the economy dampens. But when the going gets tough, how many people will continue buying premium roast coffee one small plastic cup at a time?
So even though I love the technology and the market niche, it is my expectation that this company will lose momentum as nonessential purchases get jettisoned amid economic turmoil.
Action to Take: “Hold” Green Mountain Coffee Roasters. (NASDAQ: GMCR) (**).
Green Mountain Coffee Roasters is a good company and a great growth story, but now isn’t the time to buy. The global economy is being threatened by the European sovereign debt crisis, and the U.S. economy is stumbling.
So hold Green Mountain shares.
You might also want to look at buying some puts to hedge your position’s downside risk.
I would look at the January 2012 puts, as there appears to be an increasingly liquid market in “Way Out Of The Money” (WOOTM) puts on GMCR. The round strike prices at 70 and 60 have enough outstanding interest to hedge into.
(**) Special Note of Disclosure: Jack Barnes has no interest in Green Mountain Coffee Roasters (NASDAQ: GMCR).
– Jack BarnesSource: Money Morning
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