Green Mountain and Renren Just Lowered the Boom

When companies forecast lower sales or profits, their stocks usually take a hit. It's not always easy to tell whether they're having a fire sale or burning down. Maybe it is time to get out -- or maybe it's time to buy more!

To help tell the difference, we pair up the dour guidance news with the sentiments of more than 180,000 members of Motley Fool CAPS. If the best stock pickers think the companies still have the power to turn lemons into lemonade, maybe investors should take notice.

Stock

CAPS Rating (out of 5)

Previous or Consensus Estimate

Current Guidance

Period

Green Mountain Coffee Roasters (Nasdaq: GMCR  ) ** $2.35 $2.21-$2.26 FY12 EPS
Renren (Nasdaq: RENN  ) *** $53 million $49 million-$51 million Q312 Rev

Don't blindly sell into their bearish outlook -- you still need to do some research. Use the announcement as a jumping-off point for additional research.

Kicked to the curb
Becoming emotionally invested in a stock is a dangerous thing, and for too long too many Green Mountain Coffee Roasters investors have led with their hearts as well as their wallets. While the coffee brewer's second-quarter earnings managed to squeak past expectations, it fell short on revenues and the outlook provided wasn't all that exciting, not for the next quarter or the rest of the year. Yet the stock has moved 7% higher since then and I fear it's only a matter of time before it crumbles again.

Patent expiration comes as early as next month on its K-Cups, and despite valuable branding initiatives with Starbucks (Nasdaq: SBUX  ) and Dunkin' Brands, along with distribution agreements with Wal-Mart, Target, Costco, and Bed Bath & Beyond (Nasdaq: BBBY  ) -- all of which plan to make a big promotional push behind the new Keurig machines, according to a research note by the analysts at Longbow reiterating their "buy" recommendation -- there's a lot of risk to owning this stock.

Discounted K-Cups, competing machinery -- all are attacking the basic premise of the coffee maker's existence. At nine times earnings estimates it appears cheap, but it's been burning through cash left and right and still has significant corporate governance issues, which most recently led to its former lead director resigning. While Green Mountain says it was for personal reasons, his improper sale of company stock and over-margining his shares -- which led to him being stripped of his lead status -- certainly had to play a part.

I tend to agree with CAPS member TMFJLo, who notes, despite a mildly better earnings report, that the "long-term prospects will see GMCR gone. It's got no proprietary knowledge and no brand, plus stiff competition and higher commodity prices will only allow the most efficient coffee companies to succeed in the long run."

But tell me in the comments box below whether you think the stock will continue to perk up or if it's going to leave a bitter aftertaste like day-old joe.

Still playing games 
A month or so ago I suggested that analysts who thought that Renren's stock weakness was related to Facebook's (NYSE: FB  ) woes were silly since there were plenty of reasons that the problems of one should have zero impact on the results of the other. Yet here we are some six weeks later and both stocks have continued dropping, though the "Facebook of China" is down just 17% compared to a 40% decline in the real thing.

Both agree the proliferation of mobile devices cuts into their top-line results because advertising doesn't translate very well onto a smartphone, so Renren is resorting to in-house games to boost revenues, which now account for more than half the total. Yet that's led to an increase in expenses, which ate into the bottom line.

If Renren is going to morph into a game developer, then that's going to be a very different business model than what investors were originally buying into, and it's going to put them up against some hefty competition like NetEase.com.

I've had a long-running underperform rating on CAPS and I'll be maintaining that rating, but you can tell me by commenting below whether you think a new revenue tack will improve Renren's situation and allow it to break away from walking lockstep with Facebook.

Looking under rocks
You can find more in-depth analysis on Green Mountain Coffee Roasters in the Motley Fool's new premium report that's a must-read for investors, whether you're a bull or bear on the stock. It covers all of the opportunities, business drivers, risks, and more about this fallen angel, and most important, it shows whether the company is still a buy at these cheap prices. Click here to read more now.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Starbucks, Facebook, Green Mountain Coffee Roasters, Costco Wholesale, and Best Buy. Motley Fool newsletter services have recommended buying shares of Facebook, Costco Wholesale, NetEase, Green Mountain Coffee Roasters, and Starbucks. Motley Fool newsletter services have recommended writing covered calls on Starbucks, creating a lurking gator position in Green Mountain Coffee Roasters, and writing naked calls on Dunkin' Brands Group. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (6) | Recommend This Article (5)

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 August 20, 2012, at 7:20 PM, mrosowski wrote:

    Perk Up

  • Report this Comment On August 21, 2012, at 12:51 AM, lowmaple wrote:

    But don't get a caffeine high.

  • Report this Comment On August 21, 2012, at 1:15 AM, lowmaple wrote:

    Don't get a GMCR caffeine high.

  • Report this Comment On August 21, 2012, at 3:17 AM, dollarnsense wrote:

    I am not sure where the contributor is getting the info that GMCR is "burning through cash left and right", if he would have taken the time to take a look at the past 3Q of Cash Flow statements, it can be seen, that GMCR is cash flow positive every quarter, and in two of them significantly. Now, there are certainly a couple of tricky things for GMCR to battle, but this is no excuse to make financially wrong statements. The author says not to emotionally get involved in a stock, looks like he is already way deep in it from a negative side...

  • Report this Comment On August 21, 2012, at 7:30 AM, TMFCop wrote:

    dollarnsense,

    Over the trailing 12 month period, GMCR is cash flow negative -- and tends to be more often than not, though as you say the past few quarters it has posted some positive FCF. I also don't believe that will last.

    I also don't have a position in GMCR, long or short, so there's no emotional investment for me.

    Cheers,

    Rich

  • Report this Comment On August 21, 2012, at 10:05 AM, Barkman1 wrote:

    I enjoy the Keurig brewer and the associated products so I have somewhat of an emotional tie to the brand and stock. I still believe that there is additional growth for the company in terms of increased distribution points in all retail channels as well as HH conversion to their products. The brands they have partnered with should help them somewhat navigate patent expiration. While the investment community tracks this company daily, I feel their are many consumers out there who are not aware of the brewer, the brands/products and the savings/convenience they can reap from these products in their home. I see this as the major challenge for management as they have become a mature brand in some respects but still have room to grow. So I think it will perk up provided management improves execution and marketing to increase HH penetration and conversion to their products. Jim

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