Shorts were roasted in this stock last week but in the end they will have the last laugh.
Green Mountain Coffee Roasters (GMCR) has been the shorting target of quite a few high profile hedge funds and institutions. The stock traded as high as $115 last September and could trade down to $15 this December.
Shorts were roasted on Thursday when GMCR announced better than expected earnings. However, the follow on information including guidance warnings, SEC inquiries, rising inventory and negative cash flow would appear to be an invitation to reload those shorts in anticipation of lower lows.
The market squeeze on Friday elevated many heavily shorted stocks back to initial resistance where the squeeze lost traction. That is true for the market as well. The S&P rallied to prior resistance of 1392 before stalling. The Dow rallied +250 intraday but gave back -61 points before traders covered remaining shorts into the close.
I expect the markets to start off negative on Monday unless there is some new rumor from Europe. Monday's have posted losses for the last nine consecutive weeks. Eventually that trend will end but with Friday's stall at resistance we should at least begin Monday in negative territory.
James will be back from vacation on Monday
NEW BULLISH Plays
No new Longs today
NEW BEARISH Plays
GMCR - Green Mountain Coffee - close: 21.63 change: -1.03
Stop Loss: 24.35
Current Gain/Loss: unopened
Time Frame: 4 to 6 weeks
Entry on August 6 at $ xx.xx
Earnings Date 08/2/12
Average Daily Volume = 9.7 Million
Listed on August 4, 2012
New Positions: Yes, see below
Why We Like It:
GMCR has turned into another stock that traders love to hate. It was trading at $115 last September and $21 today and that is after a +$6 spike on Thursday. The stock traded under $18 for much of July.
The spike on Thursday was due to slightly better than expected earnings. Those earnings had been revised lower so posting a surprise was not that hard. They earned 52 cents in Q2 which was only a +6% gain over the year ago quarter. In the prior quarter they increased earnings by 33% so you can see the progression.
Revenue rose +21% to $869 million but the +37% growth rate for the prior quarter declined to +31% in Q2. That may not seem like a major decline but it gets worse. The company cut its guidance for both revenue and earnings for the rest of the year.
They now project only 15-20% revenue growth compared to the mid to high double digits of prior years when growth was over 50% or even 70%. The business is definitely declining as their competition increases and their patents on the k-cups expire.
Not commonly reported in the press the company booked $2.99 million in charges for the quarter related to an SEC inquiry into their accounting practices. There was no mention if the inquiry was completed or ongoing. I suspect if it had been completed they would have been eager to announce it and remove the cloud.
Also, inventory grew by 60% in the quarter. For a company where sales are slowing it seems strange they would let inventory increase that rapidly.
They also announced they would likely have NEGATIVE free cash flow during 2012 but generate $100-$150 million in 2013. Again, exactly how are they going to do that with the business declining so rapidly?
In a grasping at straws effort they announced a $500 million share repurchase. Makes you wonder where they are going to get that cash since they are going to be cash flow negative for 2012. Of course announcing a share repurchase and actually carrying it out are two different things. The announcement may boost your stock temporarily but if you don't buy shares it will only be a temporary bounce.
I think the spike on Thursday was a simple post earnings short squeeze and Friday's minimal loss was the result of the market squeeze.
I am recommending we enter the position on any decline from the present level at $21.63.
Trigger: GMCR must be negative to enter the trade.
Suggested Position: Short GMCR stock @ $21.60, target $18.00
Buy GMCR Sept $20 Put, currently $1.51.