Did Green Mountain Deserve a Downgrade?

CoffeeThe past five trading days have not been kind to Green Mountain Coffee Roasters (NASDAQ:GMCR). Shares were off nearly 9 percent through early-afternoon trading on Monday as more and more bears are waking up and initiating short positions on the stock.

Perhaps most notably, David Einhorn, founder and president of Greenlight Capital, announced a short position in the company at the end of 2011 that began a long and on-going conversation about the future of the coffee company. Shares are off nearly 50 percent since the announcement, and as of January 15, over 37 percent of the float was shorted.

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But the debate has gone both ways. Perhaps due to overeager pessimists overselling the stock and presenting a buying opportunity, shares have come up over 81 percent in the past three months, culminating in a strong fourth-quarter that came in ahead of expectations. Many investors, initially worried that the expiration of the patents on K-Cup technology would allow companies like Starbucks (NASDAQ:SBUX) to walk all over the smaller, Vermont-based roaster, overcame their concerns and put their faith and money back into the stock.

At a glance, the 4Q results verified their belief that things aren’t all bad news bears at Green Mountain. However, price action since the earnings were released last Wednesday suggests that those same investors may be taking their profits and heading elsewhere (perhaps to grab a latte at Starbucks) because of 2013 guidance below expectations…

The company is forecasting sales growth between 14 and 18 percent for the current quarter. Ostensibly, that type of sales growth would be good for any company, but there are a few reasons this is concerning. One is the tremendous run up in the price of the stock over the past few months. That type of growth — 80 percent in three months — is not sustainable.

Two, the growth estimates are below analyst expectations. While the analysts may or may not be right, the discrepancy is still affecting investing behavior. This is compounded by the third reason the forecast is concerning, which is that Green Mountain has demonstrated that it is not very good at predicting its own sales figures. Investors have grown weary after seeing the company miss its own targets a few times.

Investors remain entrenched on both sides, but Monday’s dip is being fueled by a downgrade to “Neutral” from “Buy” by analysts at Dougherty. The downgrade was issued for many of the reasons mentioned above, as well as established bearish arguments that consumer interests are trending away from K-Cup and similar home-brew machines.

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