Thursday, March 26, 2009

Green Mountain Coffee Roasters, Inc. (GMCR)

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Peter Lynch deserves a lot of credit for getting people interested in investing. Whether or not he intended to do so, he convinced many people to buy stocks in companies whose goods and/or services they knew and liked. However, indiscriminately buying stocks in companies whose goods and services you like isn't necessarily a good approach to investment management. Just ask anyone who ever bought stock in Boston Chicken or Crocs.

Green Mountain has enjoyed incredible growth in revenue and income over the past several years. From 2006 to 2008, their revenue more than doubled. The Keurig machine is a huge hit and everyone loves their K-cups. I have one. I love it.

But that doesn't mean the stock is a good buy, at least not at these levels. As impressive as their growth to date has been, the market for high-end coffee machines and supplies is saturated. And at 35x earnings and 32x net tangible assets, the stock is richly priced. The stock may continue to move higher, but I expect it to underperform relative to the S&P. I'm initiating a small, short position this morning and will add to that short position if the stock trades over $52 in the coming weeks.

This is a crowded trade. The short interest in the stock is extremely high (over 40%). As such, it's subject to manipulation. If you can hold your short position through any price spikes, you should do well as the enthusiasm for Keurig products levels off.

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