You'll Lose Shorting Green Mountain Coffee Roasters

One of the great maxims of traders and Wall Street pros is to follow the "smart money."

I'm not much for the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

Next up: Green Mountain Coffee Roasters (Nasdaq: GMCR  ) . Are institutions bullish or bearish when it comes to the coffee company?

Foolish facts

Metric

Green Mountain Coffee Roasters

Motley Fool CAPS stars (out of 5) *
Total ratings 1,021
Percent bulls 68.4%
Percent bears 31.6%
Bullish pitches 124 out of 193
Highest-rated peers Seneca Foods, John B. Sanfillippo & Son, J&J Snack Foods

Data current as of Nov. 27.

Among the pantheon of overvalued stocks that exist on our Rule Breakers scorecard, none elicits as much frustration as Green Mountain Coffee Roasters. Fools don't believe the caffeine high can last much longer.

"Over the past 12 months, this company has cash flow from operations of approximately $40 million. The market cap is currently approximately $4.3 billion, or roughly 110 times cash flow from operations. This is completely illogical for a company in a low-tech business like roasting coffee beans. At some point, [Green Mountain Coffee] is going to crash big time," CAPS All-Star investor Entrepreneur58 wrote earlier this month.

Fair enough. All growth must come to an end at some point. Trouble is, all forecasts for the end for Green Mountain were wrong. Both revenue and profit growth are accelerating and returns on capital are rising.

Institutional ownership history

Top Owners

2007*

2008*

2009*

Latest*

Wellington Management Company

59,364

13,500

4,080,960

16,180,420

Fidelity Investments

15,299,901

14,155,591

10,264,293

11,008,993

William Blair Investment Management

-

4,835,137

5,360,976

5,635,773

BlackRock

235,350

3,147,921

5,058,723

5,296,684

Lone Pine Capital

-

-

 11,409,861

5,227,990

TOP 25 TOTAL

29,586,004

49,653,973

53,945,343

85,817,042

Source: Capital IQ, a division of Standard & Poor's.
*Indicates the number of shares owned.

Institutional investors love this sort of performance, especially the short-termers. Their momentum-driven trading style requires betting on stocks that are routinely hitting higher highs. With few exceptions, Green Mountain has been that sort of stock.

And yet some institutions are as nervous about Green Mountain as Entrepreneur58. Lone Pine Capital has cut its stake by more than 50% since last December. Tremblant Capital, another top-25 institutional owner, has sold off 48% of its holdings over the same period.

Competitor and peer checkup

Company

Institutional Ownership

Insider Ownership

Green Mountain Coffee Roasters 81.26% 11.98%
Jarden (NYSE: JAH  ) 94.45% 5.62%
Kraft Foods (NYSE: KFT  ) 76.13% 0.11%
Peet's Coffee & Tea (Nasdaq: PEET  ) 103.88% 1.84%
Starbucks (Nasdaq: SBUX  ) 75.92% 2.71%

Source: Capital IQ. Data current as of Nov. 27.

But these two are in the minority, as are most Fools. And looking at Green Mountain's ownership profile compared with its peers, I'm not sure the bulls have it wrong. Founder Robert Stiller owns nearly 11% of the business he started.

Institutions, meanwhile, own 81% of the business. That's roughly in line with its closest peer, Starbucks, but leaves room for Big Money investors to buy more if they continue to believe in Green Mountain's growth story. I still do; I'm sitting on a 13-bagger in CAPS and see no reason to sell.

Now it's your turn to weigh in. Do you think the institutions are wrong about Green Mountain Coffee Roasters? Let us know what you think using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.

Interested in more info on Green Mountain Coffee Roasters? Add it to your watchlist by clicking here.

BlackRock is a Motley Fool Inside Value pick. Peet's Coffee & Tea is a Motley Fool Big Short short-sale recommendation. Green Mountain is a Motley Fool Rule Breakers recommendation and Starbucks is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. 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 is also on Twitter as @TheMotleyFool. Its disclosure policy is smarter than the average bear.


Read/Post Comments (6) | Recommend This Article (3)

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 29, 2010, at 1:49 PM, jabamango wrote:

    GMCR will definitely go down. The stock got a momentum push from short interest. Many suckers had to buy to cover in order to minimize loss. The momentum will come to a halt when institutional investor cash in and more shorts will be placed. Only speculators can drive the price up, but long term investors will sit this one out.

  • Report this Comment On November 30, 2010, at 1:09 AM, reggidmalc wrote:

    GMCR has a winning business model and products that customers love ...growing so fast that valuation PE metrics are not out of line. No real competition in single serve coffee, tea, cocoa and hot cider categories. Patented Keurig technology. Perhaps SBUX is dumping Kraft to partner with GMCR? Buy this one now; the qrowth is accelerating.

  • Report this Comment On November 30, 2010, at 9:53 AM, LQM2 wrote:

    I'm just surprised the shorts of GMCR have any money left. Move on already.

  • Report this Comment On November 30, 2010, at 5:47 PM, alpal57 wrote:

    This is a no-brainer GMCR has quietly dominated the market in single brewers and now is ready to gear up. Think about it ,as great a job as they have done, only 1% of the coffee drinking households have a K-cup machine. Now that most retailers are pushing the machine, all they have to do is capture 2% and there sales double. Not just now but for years to come because of the K-cup consumables feature afterwards. Thus the big earnings mutiple.

    Alpal

  • Report this Comment On December 09, 2010, at 4:57 PM, JHMRETIRED wrote:

    GMCR WILL BE SELLING THEIR PRODUCT FROM THE EAST COAST TO THE WEST COAST AND THEY ARE ONLY HALF WAY THERE.....

  • Report this Comment On December 10, 2010, at 2:40 AM, JayByrd01 wrote:

    You might now want to check the stock price of GMCR on Friday!Should I buy it once the dust settles?

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