At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the worst ...
If you're an investor in Green Mountain Coffee Roasters
So I guess the only real thing to regret is that the upgrade came from Dougherty & Co. Dougherty, you see, is not just any old analyst. It is quite literally one of Wall Street's worst analysts. The banker has proven itself incapable, over the four years we've been tracking its performance, of even matching the S&P 500's performance. It's an analyst that gets most of its stock picks wrong, and has, as a result, managed to actually underperform the market by a fraction of a percent on average on all the picks it's made over this time.
And here comes Dougherty, telling you to buy a stock that just got 10% more expensive; admittedly, after it reported some pretty boffo headline numbers. But still …
Does that sound like a good idea?
The good news here is that while there are many things that Dougherty does badly, there is one area of the equity world where it tends to choose correctly: coffee. Fact is, while Dougherty's margins of victory may not look particularly impressive, the company is so far batting 1.000 on its coffee picks:
|
Company
|
Dougherty Said |
CAPS Rating |
Dougherty's Picks |
|---|---|---|---|
|
Peet's Coffee & Tea |
Outperform |
** |
6 points |
|
Caribou Coffee |
Outperform |
* |
5 points |
|
Green Mountain |
Outperform |
* |
<1 point |
The bad news is that several other numbers are also up; the kinds of numbers that investors often overlook at their peril.
Reading tea leaves, divining grinds
For instance, revenues soared 64% last quarter (good), but inventories and accounts receivable grew even faster -- up 80% and 87%, respectively. This is bad because it suggests Green Mountain is piling up unsold, and presumably perishable, goods on its shelves, while at the same time collecting payments less quickly than it might prefer.
This kind of poor working cash flow management also ties up cash that, all things considered, Green Mountain would probably rather put to better use. Result: Negative free cash flow in fiscal Q4 2010 was three times as bad as in Q4 2009. Not a good sign.
Unfortunately, it's also not unusual. As my Foolish colleague Seth Jayson pointed out earlier this week, this company may consistently report strong profits, as GAAP accounts for such things. But the fact remains that over the past 12 months, even as it reported steadily increasing GAAP "profits," Green Mountain burned through nearly $64 million in free cash flow. (While cash-burn is hardly a rare event at the company, I can't help but notice that this is almost 50% more cash than Green Mountain burned over the past five years combined.)
Contrast this with the performance of the dueling titans of coffee vending, Starbucks
Yet somehow, Green Mountain seems incapable of imitating their success. You'll understand, then, why I'm less than sanguine about Green Mountain's business model.
Foolish final thought
Let me be clear here: I'm not saying Green Mountain Coffee Roasters isn't successful at selling coffee. (With 64% sales growth, it clearly is.) I'm saying Green Mountain isn't successful at making money from selling coffee. If you're not interested in making money, by all means, follow Dougherty's advice and buy the stock today. On the other hand, if you're looking for a profitable investment in a smart business, look elsewhere.
