Why I'm Not Buying Green Mountain Coffee Roasters

This article is part of our Rising Star Portfolio series.

Under different circumstances, I'd be all over shares of Green Mountain Coffee Roasters (Nasdaq: GMCR  ) for the Rising Star portfolio I'm managing for Fool.com. I'm searching for reasonably priced, socially responsible stocks; Green Mountain's green reputation goes beyond its name. Although it's traditionally an overpriced growth stock, Green Mountain's bloodbath yesterday could have yielded a bargain share price. Here's the problem, though: I just don't trust that all's well at Green Mountain.

I addressed some of my issues with Green Mountain this time last year, when the Rising Star portfolio project had just launched. Green Mountain does possess socially admirable attributes. The company distributes fair-trade coffee, works to decrease its carbon footprint, encourages employee volunteerism, and runs programs to reduce poverty and hunger.

Green Mountain bulls will point to the success of its Keurig single-cup brewer, as well as K-Cup deals with Caribou (Nasdaq: CBOU  ) , Starbucks (Nasdaq: SBUX  ) , and Dunkin' Brands (Nasdaq: DNKN  ) . And of course, for years on end, Green Mountain exhibited all that growth.

That's the crux of the "trust" issue, though. Green Mountain's growth may not be what it seems.

Green Mountain's latest quarter missed analysts' sales expectations, but there's more to the story than the overdone panic that usually yields good stock buys. Plenty of people have been calling shenanigans on Green Mountain's accounting. (The SEC launched an investigation, in fact.)

Former Crazy Eddie CFO (and convicted-fraudster-turned-anti-white-collar-crime-crusader) Sam Antar has long questioned Green Mountain's true worth; CNBC's Herb Greenberg has also leveled tons of tough questions regarding Green Mountain's reports. Greenlight Capital's David Einhorn joined the bearish contingent with a short position recently, citing a "litany of accounting questions." T2 Partners' Whitney Tilson (known for his pre-bloodbath bearishness on Netflix (Nasdaq: NFLX  ) ) is also short the shares.

Years ago, Green Mountain's financial statements came across as so incredibly complex after its string of acquisitions that I came to a conclusion: Complexity was reason enough for individual investors to avoid its shares. "Confusing" doesn't indicate "wrongdoing," of course, but there's something to be said for keeping one's investments as simple as possible. Meanwhile, Green Mountain's continuously skyrocketing valuation kept it off my radar as a stock idea, too.

In the here and now, CEO Lawrence Blanford has denied that Green Mountain's sales miss has anything to do with bears' allegations of accounting problems. Still, yesterday Greenberg pointed out that Blanford's explanation about "changes in ordering patterns in our grocery and club channels" is enough to sound alarm bells when management's also trying to claim that demand isn't changing.

Social responsibility doesn't trump fiscal responsibility, and some believe Green Mountain's true financial picture might actually be downright reprehensible. There's no reason to take such a risk; I'll stick with Starbucks, thanks.

Alyce Lomax owns shares of Starbucks. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks, Netflix, and Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days. 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 (12) | Recommend This Article (13)

Comments from our Foolish Readers

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 November 11, 2011, at 11:23 AM, pantera100 wrote:

    HOW AMAZING AFTER SODA AND GMCR DROP LIKE THE NIAGRA EVERY ONE IS AN EXPERT ON STOCKS. 25-35 % DROPS ?????? ARE YOU KIDDING ME?

  • Report this Comment On November 11, 2011, at 11:34 AM, mdk0611 wrote:

    Isn't there a potential problem related to the expiration of some patents related to the K-Cup next year? I believe that was mentioned in a WSJ article yesterday

  • Report this Comment On November 11, 2011, at 11:45 AM, pushkin9 wrote:

    Isn't there a chance that what CEO Lawrence Blanford is saying about the miss is reasonable? The price increase this quarter triggered pre-buying last quarter. That's not an unusual event. And, yes, that would be a change of ordering patterns for GMCR's customers for a quarter. Is it that unreasonable of an explanation? The shorts have been barking at this tree for a long time, the stock dropped because of the negative publicity and revenue miss, but not because of all the allegations that they made. they got lucky in this situation. all the arguments that shorts have been using applied to the previous quarter too, and that quarter was spectacular. why was it so spectacular? because customers were pre-buying. You almost need to take this quarter and previous quarter and average them to get the true picture.

  • Report this Comment On November 11, 2011, at 12:05 PM, ellerykurtz wrote:

    GMCR is probably being manipulated by the bears right now. Lots of negative postings and commentary caused more damage than the actual numbers. Short positions were the name of the game for the last few days. Those shorts made money but will soon be gone as GMCR is a company that cannot be held back. The future will bear this out.

  • Report this Comment On November 11, 2011, at 4:26 PM, CJKun wrote:

    GMCR is putting all it's hopes into their new upcoming Keurig maker and new K-Cup design, but so far the US Patent Office has rejected their new design (read Einhorn's presentation). Even if they get a patent for this new design, I am not going to purchase another Keurig System and/or more expensive Green Mountain K-Cups, when there will be a host of K-Cup competitors on the market and my current Keurig works just fine. Their growth is just not sustainable.

  • Report this Comment On November 13, 2011, at 11:49 AM, cattywampus wrote:

    I'm a short time fool and little versed in the short attack. I watched with great interest when YONG, the chinese fertilizer company was attacked and NFLX was so publicly debated over the Tilson short position. Thanks for some perspective on the GMCR debate. The intricacies of these different companies is confounding to me, but I'm learning.

  • Report this Comment On November 15, 2011, at 2:15 AM, TurbulentTime wrote:

    Now, the way I see Green Mountain is this: Regardless if their new Keurig and K-cup will be well received or not, if I compare this single cup coffee industry with memory card industry, I see more and more competition coming on board soon, and as such, drive profit margin down. Especially when the original K-cup patent will expire. I don't wanna repeat my mistake with San Disk. I remember that company stock did very well at first, yet once other manufacturers caught up in the game, the stock price started to be pressured, and eventually erased almost all of my original gains. I won't repeat this with Green Coffee. I am out.

  • Report this Comment On November 15, 2011, at 2:46 AM, Clint35 wrote:

    Financial shenanigans or not. There's one simple reason to stay away from GMCR. They have no free cash flow.

  • Report this Comment On November 15, 2011, at 3:04 AM, TurbulentTime wrote:

    By the way I bought Green Mountain when it was $20.15 per share, have been out 25% at $95 per share, then sold another 50% at $105 as I thought the p/e started to look very ... well... too rich. I still held the rest of 25% until the day before the crazy drop. So, I sold the remaining 25% at $70.35 per share. I also have sold some Starbucks, I have some cash on hand now, I may actually not think about coffee companies all together for a while as opposed to my original strategy to long back Green Mountain after its fall. After I read the lowering profit margin of this segment from an Asian Economic magazine, I got cool feet for Green Mountain. Anyway, I might just buy some REITs, or Silver and Gold mining companies stocks. Will see.

  • Report this Comment On November 15, 2011, at 3:08 AM, TurbulentTime wrote:

    Oh yeah, Clint, and Green Mountain has no free cash flow. That is .... so.... dotcom.

  • Report this Comment On November 15, 2011, at 7:08 AM, TruffelPig wrote:

    Why would anyone buy stock in this? - never did, never will.

  • Report this Comment On November 16, 2011, at 9:24 AM, pushkin9 wrote:

    Seems like you should have been buying, everybody who did the opposite of you is happy....

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