NEW BEARISH Plays
Keurig Green Mountain, Inc. - GMCR - close: 50.75 change: -0.97
Stop Loss: 54.25
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on October 31, 2015
Time Frame: Exit PRIOR to earnings on November 18th
Average Daily Volume = 2.5 million
New Positions: Yes, see below
Oh how the mighty have fallen. Shares of GMCR rallied from $17.00 in summer of 2012 to almost $160 in November 2014. A couple of days later, on November 19, 2014, GMCR reported earnings and guided lower. That warning has kicked off a year-long decline in the stock.
GMCR is in the consumer goods sector. According to the company,
"Keurig Green Mountain, Inc. (Keurig) (GMCR) is reimagining how beverages can be created, personalized, and enjoyed, fresh-made in homes and workplaces. We are a personal beverage system company revolutionizing the beverage experience through the power of innovative technology and strategic brand partnerships. With an expanding family of more than 80 beloved brands and more than 575 beverage varieties, our Keurig® hot and Keurig KOLD® beverage systems deliver great taste, convenience, and choice at the push of a button. As a company founded on social responsibility, we are committed to using the power of business to brew a better world through our work to build resilient supply chains, sustainable products, thriving communities, and a water-secure world."
GMCR really has revolutionized how the world drinks coffee with their single-serving machines and coffee pods. Unfortunately they got a little greedy. When they released their Keurig 2.0 brewer (summer of 2014). The new design had an optical scanner that read the top of each pod placed in the brewer. If you placed an unauthorized (third-party) pod in the machine it would not brew. Consumers rebelled and sales plunged.
Since then sales of brewing machines and pods have suffered. GMCR is facing growing competition for both the brewers and the coffee pods. It does seem like everyone is selling the individually packaged coffee pods these days including Starbucks, Dunkin' Brands, McDonalds, and many more.
GMCR's most recent earnings report was in early August. Wall Street was expecting a profit of $0.79 a share on revenues of $1.04 billion. GMCR delivered $0.80 a share but revenues fell -5.2% to $969 million, below estimates. Furthermore GMCR drastically reduced their Q4 guidance to $0.70-0.75 a share. Analysts' estimates were $0.97. GMCR said revenues would like fall -11% to -13%. GMCR management tried to soften this bad news by announcing an additional $1 billion to their stock buyback program. It didn't work. The stock collapsed. You can see the gap down on the daily chart.
The market has also been disappointing with GMCR's newest product the Keurig Kold, which brews cold beverages (sodas). It's easy to see why GMCR would want to get into this market. Estimates put the hot beverage market (in the U.S.) at $10 billion. Yet the nonalcoholic cold beverage market in the U.S. is over $50 billion. The funny thing is soda/cola/pop consumption has been falling for 10 years in a row. Consumers are slowing turning away from soda drinks over healthy concerns.
Another challenge with GMCR's new Keurig Kold machine is the price. It's very expensive at $370 a pop. You can buy a Sodastream machine for less than $100. GMCR does have an advantage over Sodastream thanks to GMCR's partnerships with companies like Coca-cola (KO) and Dr. Pepper (DPS). Consumers might be tempted to make their own Coca-cola flavored drinks at home than some no-name, generic cola. However, if you want to make your own coke or Dr. Pepper at home it's going to cost $1.00 a drink. That's expensive when you can buy cans of coke or Dr. Pepper for $0.50-0.75 each. Plus, consumer reviews note that the machine is slow nor does the product taste the same as the store-bought variety.
The oversold bounce from its August plunge peaked in September. Shares of GMCR have been falling under a bearish trend of lower highs. The bears have been right on this stock. The most recent data listed short interest at 14% of the 115 million share float. While the trend is down there is a risk that any good news could spark a short-term squeeze higher.
After a plunge from $160 to $50 some analyst might decide it's "cheap" and upgrade GMCR. That could produce a brief spike higher. GMCR has long been rumored to be an acquisition target by a larger beverage company. Coca-cola (KO) is the most often rumored buyer. KO does have a stake in the company. KO purchased a 10% stake back in February 2014 and upped it to 16% in early 2015. These are likely the two biggest risks if you're short.
The trend is down and falling sales would suggest this trend continues. If GMCR trades under $49.00 it will generate a new sell signal on the point & figure chart. The October low was $49.51. We are suggesting a trigger to launch bearish positions at $49.40. We will plan on exiting prior to GMCR's earnings report in mid November. There is no official earnings date yet but they will likely report in the next two or three weeks.
Trigger @ $49.40
- Suggested Positions -
Short GMCR stock @ $49.40
- (or for more adventurous traders, try this option) -
Buy the DEC $45 PUT (GMCR151218P45) current ask $2.50
option price is a current quote and not a suggested entry price.
Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.
Option Format: symbol-year-month-day-call-strike