Throw This Stock Away

Nothing wakes me up in the morning like a fresh cup of dissension.

Maybe it's because I was a middle child, always angling for conflict in my youth. Maybe it's because I'm difficult to satisfy or enjoy being the devil's advocate.

No matter what, my serial contrarian approach dovetails perfectly into this weekly column where I bash a company to bits. I'm no senseless thrasher. I always come right back and offer up three related recommendations that I feel will be better fit in your portfolio.

It's the right thing to do.  

Who gets tossed out this week? Come on down, Green Mountain Coffee Roasters (NASDAQ:GMCR).

United we strand
The battle for Diedrich Coffee (NASDAQ:DDRX) is over. Green Mountain has emerged victorious, as Peet's Coffee (NASDAQ:PEET) was unable to match the final $35 a share offer.

I have never been entirely comfortable with Green Mountain going after one of its Keurig K-Cup partners, but it just seems as if it's overpaying for a company that seemed perfectly fine with Peet's original $26 a share buyout proposal last month.

The desperation in drumming up bids for a stock that traded for as little as $0.21 a share earlier this year is telling. Green Mountain's Keurig has had an amazing ride, but maybe it sees the organic gravy train slowing.

It's true. I recommended Green Mountain to Rule Breakers subscribers in February, when the stock was fetching a split-adjusted $26.79. It has gone on to more than double in less than ten months. I'm proud of that pick, and it truly embodies the very nature of industry-disrupting growth stocks that we aim to smoke out at that newsletter service.

However, the market has been showing growing impatience with Green Mountain lately. It didn't appreciate the sequential dip in revenue and K-Cup refills during the fiscal third quarter. There is seasonal logic to the slip, but it shouldn't happen given the company's heady gains in actual brewer sales.

Then the stock got hit after last month's fiscal fourth-quarter report, an otherwise solid showing save for its disappointing guidance for the current quarter. The company expanded its reach into Wal-Mart Stores (NYSE:WMT) this year and has new brewer manufacturer partners for next year, but margin expansion has been a slow spectator sport.

Green Mountain isn't cheap, trading for more than 30 times forward earnings. Its recession-resilient growth is certainly worthy of a premium, but looming patent expiration concerns and the ever-changing state of coffee consumption pose question marks to a company that prefers to deliver exclamation points.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting tossed. Let's go over three new fill-ins.

• Peet's -- To the loser go the spoils. Peet's will be receiving at least $8.5 million from Green Mountain in merger termination fees. Shareholders that liked the original Diedrich deal at $26 but then went on to knock down Peet's stock with every subsequent bid can also rest easy. Peet's isn't growing as quickly as Green Mountain, and it's trading at a problematic 25 times next year's projected profitability. Larger rival Starbucks (NASDAQ:SBUX) can be had for a lower multiple. However, Peet's still has room to grow and will find ways to enter the K-Cup market if it sees it as prudent.
• Lifeway (NASDAQ:LWAY) -- A smaller trend than single-cup java is a probiotic dairy beverage called kefir. The Eastern European staple has been championed domestically by Lifeway, and it's starting to take off. Lifeway's revenue in the latest quarter soared 37%. Operating income and pre-tax profit more than doubled as gross margins widened. Earnings have doubled to $0.32 a share through the first nine months of the year. Lifeway trades for 24 times next year's net income projection, but it's growing faster than Peet's. There is always the threat that bigger dairy and drinkable yogurt companies will dive into this niche, but Lifeway continues to establish itself as the name that matters.
• Smart Balance (NASDAQ:SMBL) -- Another food stock that I'm really fond of is Smart Balance. The company's signature product is its heart-healthy namesake buttery spread. Despite a recession that has been brutal to premium-priced foodstuffs, Smart Balance has boosted its market share in spreads for 31 quarters in a row. It has tried to expand its brand's reach through peanut butter, cooking oil, and popcorn, but now it's planning a national rollout of milk. There is plenty at stake here, since milk is a more frequent purchase than the company's other lines.

Sorry, Green Mountain. The grass may be greener elsewhere.