I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Green Mountain (Nasdaq: GMCR). Is the would-be king of caffeinated home brew the real thing? Let's get to the numbers.

Foolish facts

Metric

Green Mountain Coffee Roasters

CAPS stars (5 max)

*

Total ratings

1,006

Percent bulls

67.6%

Percent bears

32.4%

Bullish pitches

120 out of 186

Highest rated peers

Seneca Foods, John B. Sanfillippo & Son, J&J Snack Foods

Data current as of Sept. 30.

Allow me to admit a bias up front. Not only is Green Mountain Coffee one of our best-performing picks in Rule Breakers, it's also the best-performing pick on my Motley Fool CAPS scorecard -- an 11-bagger over the past four years. The run-up has many Fools wondering if now's the time to sell, or short.

"Coffee along with the other soft commodities are on a stellar run which is expected to continue, but even with the company's acquisitions I can't justify their current valuation of $4.1 [billion]. Consistently positively cash flow from operations but they are looking to take on a lot more debt now to finance more acquisitions, and I feel they are way overbought right now and due for a pullback," wrote All-Star investor jamespeer two weeks ago.

He's been proven right since then. Shares of Green Mountain fell more than 5% yesterday on news that the Securities and Exchange Commission (SEC) has opened an inquiry that may involve the coffee roaster's revenue-recognition practices. An investigation could take months, leading to a slow and steady decline in the share price.

What we know so far is that Green Mountain admits an accounting error from 2007 wherein management overstated per-share earnings by $0.03. The company booked $0.11 in diluted earnings that fiscal year; a little more than 25% will now be erased.

That's significant. But does it alter the rest of Green Mountain's remarkable growth story? I'm not so sure.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth

121.1%

86.8%

79.3%

Revenue growth

68.8%

60.5%

46.4%

Gross margin

32.3%

31.1%

35.4%

Receivables growth

88.1%

67.1%

39.1%

Shares outstanding

131.7 million

130.8 million

109.4 million

Source: Capital IQ, a division of Standard & Poor's.

Picasso couldn't paint a better growth picture than the one Green Mountain has created. Let's review:

  • Revenue and net income growth have accelerated in each of the past three years. ('Nuff said.)
  • Green Mountain hasn't needed excess receivables growth in order to generate massive revenue and income gains. This suggests a measure of operating leverage in the underlying business.
  • But it's gross margins where this story gets really interesting. Green Mountain says its newly revealed revenue recognition problems are the result of miscalculating margins. The implication? Margins will be adjusted downwards, impacting net income. And yet the impact may not be huge. Gross margins have already declined in the wake of outrageous growth over the past three years, which, again, looks like operating leverage at work.

Competitor and peer checkup

Competitor

Normalized Net Income Growth (3 yrs.)

Green Mountain Coffee Roasters

95.9%

Kraft Foods (NYSE: KFT)

3.1%

Peet's Coffee (Nasdaq: PEET)

32.1%

Procter & Gamble (NYSE: PG)

1.8%

Sara Lee (NYSE: SLE)

4.8%

Starbucks Coffee (Nasdaq: SBUX)

10.7%

Source: Capital IQ, a division of Standard & Poor's. Data current as of Sept. 30.

Green Mountain is the overwhelming winner in this table, no doubt due in part to its acquisition and successful marketing of the K-Cup single-cup brewing system, which Starbucks has since copied with its VIA instant brand. So be it. Success breeds imitators.

Grade: Sustainable
Will the imitators take a straw to Green Mountain's cup of profits? They haven't so far, and I don't believe they will now. Instead, I see the SEC inquiry surfacing troubling issues as the biggest threat to investors at current prices. But given management's record of excellent stewardship in years past, I suspect the agency's findings will include minor infractions and nothing more. I'm sticking with my outperform call.

Now it's your turn to weigh in. Do you like Green Mountain Coffee Roasters at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

For further Foolishness featuring Green Mountain Coffee Roasters:

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Green Mountain Coffee Roasters is a Motley Fool Rule Breakers recommendation. Starbucks is a Motley Fool Stock Advisor selection. Procter & Gamble is a Motley Fool Income Investor pick. 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. The Motley Fool owns shares of and has written covered calls in Procter & Gamble and is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.