Black Clouds Over Green Mountain

Green Mountain Coffee Roasters (Nasdaq: GMCR  ) is making a killing on Keurig K-Cup products and snapping up every K-Cup supplier with a pulse. The stock price has more than tripled over the last two years and the P/E ratio sits at a fluffy 60 times trailing earnings. Current shareholders have been treated like kings by this stock.

But on Tuesday, the company filed an 8-K statement to disclose some troubling issues. Chief among them: the SEC is conducting an inquiry. The SEC has requested documents and company suspects the SEC is interested in how Green Mountain recognizes its revenue and how it conducts its relationship with a specific vendor. This happens all the time to perfectly respectable businesses -- the SEC isn’t composed of mind readers. But this fact was disclosed over a week after the investigation started and buried at the bottom of the 8-K, where it can be easily glossed over.

Tuesday afternoon, the announcements of investigations by law firms started pouring in. The stock fell 16% on Wednesday on more than ten times average daily trading volume, so if you're thinking about selling your shares, you're in good company. And by today at least one lawsuit had been announced.

Selling this stock short is also a real and popular possibility. Over 23% of Green Mountain's shares were sold short at the last reckoning, placing the stock just below notoriously super-shorted Overstock.com (Nasdaq: OSTK  ) and a bit above equally controversial coffee rival Peet's Coffee & Tea (Nasdaq: PEET  ) .

If Green Mountain did indeed fiddle with its revenue policies, that puts the entire income statement in a bad light. If you can't trust the top line, how on earth could you rely on what the bottom line says after adjustments? Selling or shorting a company that's under investigation could make a lot of sense, especially after Green Mountain’s two-year run-up and lofty valuation. High-quality earnings follow from reliable revenue, and we might not be getting that from Green Mountain. Let’s see what the SEC says.

Follow this spine-tingling opera of financial failings to its conclusion by adding Green Mountain to My Watchlist. It's a fun, free way to keep tabs on your favorite (or not so favorite) stocks.

Fool contributor Anders Bylund holds no position in any of the companies discussed here and imports his coffee beans directly from a Guatemalan roaster. Green Mountain is a Motley Fool Rule Breakers pick -- is it breaking the wrong rules now? Apple is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


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