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
"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
"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
"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
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.