Green Mountain Coffee: Tomorrow's Monster Stock Today?

Stocks that climb to 10 times their original price are rare breeds. But they're not impossible to find, especially when you have Fools for friends.

The market's best stocks include companies that have risen dozens of times in value by taking advantage of the market's weaknesses. These aren't penny stocks; they're viable companies with sound business prospects that are achieving phenomenal returns. Finding just one or two of these monstrously successful firms can help you establish a winning portfolio.

Stalking the monster
To find tomorrow's winners, we've enlisted the help of more than 180,000 monster trackers at Motley Fool CAPS who have successfully picked stocks that have doubled, tripled, or even quadrupled in price. This week, gweech gives us coffee brewer Green Mountain Coffee Roasters (Nasdaq: GMCR) as the All-Star member's next monster pick. He made his mark with The Blackstone Group, which surged 368% after he picked it to outperform the S&P 500 that rose only 57% in the same time frame.

Of course, you shouldn't jump into the breach just because an All-Star stock picker did. Just consider this as a starting point for your own research of extreme buying opportunities.

Green Mountain Coffee Roasters snapshot

Source: FinViz.com.

A million here, a million there ...
I'm going to make a startling admission as a coffee-brewer bear: I think Green Mountain Coffee Roasters is going to continue owning the single-cup brewing market. Despite a flood of competing machines on the market by everyone from Starbucks (Nasdaq: SBUX) to Kraft (NYSE: KFT), the best-known brand is and will remain Keurig. Come what may, it should stay atop the best-selling-brands list.

Unfortunately, Green Mountain's money isn't made on machine sales, but rather on its K-Cups, and with patents expiring this month it's going to be losing a large chunk of change. Supermarket chain Safeway is just the latest to announce it will be selling private-label coffee pods, joining Kroger and TreeHouse Foods in offering generic alternatives.

... and soon we're talking real money
Java bulls counter the patent expiration and competition is priced into the stock -- and a loss of more than three-quarters of its value over the past year suggests they may be right -- but Green Mountain itself says its upbeat guidance has also accounted for the wave of generic pods that will hit the shelves. It anticipates 25% to 30% growth in the fourth quarter, amounting to full-year increases of 43% to 45% for the year, and 2013 will enjoy 15% to 20% growth.

My colleague Rick Munarriz adds that it's not written in stone Green Mountain has to sell the Keurig machines at cost as it does now; it could pad the price and generate a bit more profit on them. And with its new, more expensive (and newly patent protected) system on the market, paying up a little more for the Keurig may not seem so bad.

Turnabout is fair play
I think it's going to have to do that, though, as a matter of survival. Green Mountain right now has lucrative branding agreements with both Starbucks and Dunkin' Donuts parent Dunkin' Brands (Nasdaq: DNKN). Starbucks' Versimo machine is a high-pressure espresso maker, not a low-pressure machine like the Keurig, so they don't necessarily compete for the same customer, but because Green Mountain is coming out with its own espresso maker made in partnership with Italy's Lavazza in time for the holidays, just how long before Starbucks starts making its own pods? Right now they're enjoying each other's company, but Green Mountain needs Starbucks more than the other way around.

Some analysts don't see it that way. Roth Capital said last week it sees inroads being made by generic competition as relatively small and market share gains minimal. Certainly Primo Water found breaking into the make-at-home soda market dominated by SodaStream International (Nasdaq: SODA) wasn't as easy at it looked, and it may have to sell its business now.

Price is what you pay
Even so, I find the bullish optimism a bit like whistling past the graveyard, putting on a brave front while inwardly trying to control a mouth full of chattering teeth. At less than 10 times earnings estimates, Green Mountain still doesn't generate any free cash flow, so while it might not be as expensive as it once was, until we get a few quarters under our belt of its operating with real competition, it's premature to say it will be able to take on all comers.

I'll be maintaining my underperform rating on CAPS, but tell me in the comments section below whether you think Green Mountain Coffee Roasters will suffer a jolt upon patent expiration.

A chance for scary growth
If you're looking for more information on what a Green Mountain investment portends, there's a premium report on Green Mountain, exploring the Keurig champ's challenges and opportunities. A free year of updates is included, so get up to speed on the java heavy.