2 Awful Companies That Will Make You Money

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Jim Gillies loves awful companies. They've made him a lot of money over his investing career. Today, the Motley Fool Options advisor is watching two companies that share echoes of awful companies past that he had been able to ride to huge gains.

A beautiful mess
Jim didn't become an investment analyst to make friends, which is good because he has a tendency to upset folks who have fallen in love with a particular stock. And that's the case with Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , a rule-breaking media darling that came out of nowhere with its Keurig one-cup coffee brewers and the accompanying K-Cups. The ingenious razor-and-blades model has investors drooling. Jim? Not so much.

"At best, this is a soon-to-be-debt-laden over-growing train wreck waiting to happen," he says. "At worst, it's accounting fraud. The company's dealing with fictional earnings. There's no cash flow underlying its earnings." Green Mountain is now facing an SEC inquiry, which has put a dent in its soaring share price.

Additionally, Green Mountain no longer will have this market segment to itself. Starbucks (Nasdaq: SBUX  ) CEO Howard Schultz stated that the Keurig near-monopoly won't last long. "Tougher competition is inevitable in the single-serving coffee market. Starbucks isn't going to sit still and allow Green Mountain to dominate this growth market," said the CEO.

"And really, any time the CEO of a successful, established, much larger company calls you out by name and announces he's coming after you, it's not a good thing for the future of your business," Jim says. He is looking closely at a bearish play on Green Mountain.

Fit to be bought
In Stocks 2010, Jim recommended readers pick up shares of medical trailblazer Somanetics, makers of a system that monitors the amount of oxygen in the blood flowing to and from the brain in order to reduce bad outcomes during and after surgical procedures. He made the bold assertion that Somanetics would be bought out at a premium over the course of the year, and went so far as to name the suitor who would prevail. He looked pretty smart -- and those who followed his advice were pretty pleased -- when Covidien (NYSE: COV  ) acquired the company in June, sending shares up more than 70% in the seven months between Jim's pick and the acquisition.

"There are small medical device companies and there are large medical device companies, but there are no medium-sized medical device companies," says Jim. "So it seemed fairly clear that Somanetics was primed for an acquisition."

So, with his bona fides established, Jim's buyout sense is tingling again. His pick for this year's installment is Red Robin Gourmet Burgers (Nasdaq: RRGB  ) , which as you might have ascertained from the name, is a burger joint that offers fancy toppings. As an occasional customer, I can tell you that the food's decent and the kids love it -- very few places offer both corn dogs AND macaroni and cheese. But, as Jim tells me, this is a chronically mismanaged company. In a misguided attempt to build an empire, leadership went on a new-store rampage, the CEO of this $300 million company flying on a private jet. There's just one big problem: although it has 60% more stores in its network than five years ago, the shares are down by two-thirds since mid-2005.

A year ago, activist investors came on the scene and started rattling cages, making the demand that the company actually consider creating value for outside shareholders. Startlingly, management capitulated to the activists' demands, ousting the growth-obsessed CEO and replacing several members of the company's board of directors. Today, roughly a quarter of Red Robin's shares are owned by investors who are actively looking to sell at a high price. Much like the Somanetics situation and with echoes of several others burger purveyors that tried to grow too big too fast -- see Steak N Shake -- Jim's anticipating either improvement once the activists' demands are acted on or, more likely, a buyout by a company that will change the culture from value-destroying to focusing on intelligent capital structure. Don't be surprised to see a purchase in the high $20s within a year.

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Roger Friedman doesn't own shares of any companies mentioned, but they're all now on his watchlist. Covidien is a Motley Fool Inside Value choice. Green Mountain Coffee Roasters is a Motley Fool Rule Breakers recommendation. Starbucks is a Motley Fool Stock Advisor pick. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (21)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 20, 2010, at 4:56 PM, myost4 wrote:

    Well, all I can say is Starbucks making a comment like that makes me even more committed to never drinking their coffee. If the only way a big company like Starbucks can grow is to put others out of business - I will take my business to the smaller shops. Hey Starbucks, last time I checked, giants stepping on others weren't winning any popularity contests.

  • Report this Comment On December 20, 2010, at 7:20 PM, baldheadeddork wrote:

    Yeah, your billion-dollar company is beating up on my billion-dollar company.

    Go team.

  • Report this Comment On December 21, 2010, at 9:15 AM, PJAG13 wrote:

    You can say what you want about GMCR, but they have been growing and showing growth and profit for quite a few years now. The Keurig is not going anywhere. No one has come up with any better. Green Mountain coffee has such great varieties of coffee, even Starbucks can't hold a candle to that. They are constantly improving the Keurig that it will be hard to beat.

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Related Tickers

12/31/1969 7:00 PM
COV.DL $0.00 Down +0.00 +0.00%
Covidien CAPS Rating: *****
GMCR.DL $0.00 Down +0.00 +0.00%
Keurig Green Mount… CAPS Rating: **
RRGB $45.60 Up +2.35 +5.43%
Red Robin Gourmet… CAPS Rating: ***
SBUX $53.63 Up +0.04 +0.07%
Starbucks CAPS Rating: ****