Insiders are Buying This Stock Heavily...Should You?

Following large, recent, insider buying is a fun way to screen for stocks. It's not scientific, and shouldn't be an investment thesis on its own, but it still can be a very bullish sign. In fact, many studies have shown that stocks of companies with heavy insider buying go on to outperform the market by as much as 7%.

After a year of success, thanks to unlikely deals with Dunkin' Brands Group (NASDAQ: DNKN  ) and Starbucks (NASDAQ: SBUX  ) , Green Mountain Coffee Roasters (NASDAQ: GMCR  ) is fighting to keep competitors at bay. Over the past month a few members of Green Mountain's management team have bet big on the stock, with heavy insider buying. Let's dig into this story, to see if this stock can keep brewing tasty returns. 

The buy
K-Cup and Keurig machine pioneer Green Mountain Coffee Roasters, saw large insider purchases by three directors over the past month. Directors David Mackay and Norman Wesley each bought over $600,000 in stock, and Allan Steele made a smaller buy of $129,160. With over $1.5 million in stock bought up in just the past few weeks, the question is, are these insiders on to something?

The bull
In the case of Green Mountain there are many things to be bullish about. As I'd mentioned, the company has expanded its reach by partnering with Dunkin' and Starbucks to sell products in their stores, while producing K-Cup products for both of their brands. 

Further, the entire landscape of coffee stocks, which includes Dunkin' Brands and Starbucks, is experiencing two large-scale bullish trends that should benefit all three companies.

1. The first bullish coffee trend is the fact that Americans are drinking more coffee than ever. A recent study by Beverage Industry showed that a whopping 83% of American's drink coffee, up 5% from just last year! 

2. Yet even as demand, and sales, increase for these coffee purveyors the cost of coffee beans has been on the decline. If this trend continues, profit margins should continue to show gains. 

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Aside from the favorable industry trends, Green Mountain is also coming off of a very strong quarter. Earnings rose 39% and beat expectations, revenue grew 22%, and Green Mountain announced a share buy-back and initiated a dividend. Days after the results were announced, these three Directors made their purchases.

The bad
Green Mountain currently earns about 81% of its revenues from single-serve packets. With its K-Cup no longer under patent, the company is facing increased pressure from private label providers such as Whole Foods Market. It's easy to see why some investors feel like Green Mountain's deals with Dunkin' and Starbucks benefit its lower risk partners, more than they do Green Mountain.

With a 10-15% decline of K-Cup market share projected, and a new dividend, one has to wonder if Green Mountain's fast-growing days are in the past. Is the dividend a sign that management is expecting to be a plotting, slow-growth, business (say, the Microsoft of coffee)? 

I think it is, but while this is Green Mountain's biggest "problem," it's not all bad. 

The verdict:
Investors should remember three key facts when it comes to Green Mountain. 

1. Keurig machines are still patent protected, which provides incentive for companies like Starbucks to partner with Green Mountain, rather than go private label.

2. These partnerships should help off-set the loss of single-serve market share

3. The company is selling at 20 times earnings, with a PEG hovering near 1; it's simply not priced for rapid growth.

Given its valuation, high-profile partnerships, and the growth of the overall coffee market, I think there's more positive than negatives at Green Mountain right now. Coming off of a great quarter, I think the insider buying is due to the fact that the company has had a better year than the stock has. 

Insider Buying: Never bullish on its own--but it helps
You'd like to think that insiders have a better understanding of their company than we could ever hope to. But that alone isn't reason enough for us to buy a stock. When I look at Green Mountain, and try to determine whether the insiders are correct, I see a clash of two trends. 

On one hand, the company is going to lose ground in K-Cups, but on the other it seems to be doing nearly everything right to offset that decline.

The company is due to grow slower, and we need to be aware of the risks, but I think there's still a strong bull case to be made. That's what the people in the know think. Do you agree?

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  • Report this Comment On December 09, 2013, at 5:18 PM, trdr2012 wrote:

    Insiders also, generally, having the added beneficial insight to any potential partnerships in the works or already inked, often utilize such knowledge to capitalize on and enhance "insider buying" accordingly.

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