Thursday, April 29, 2010

When Momentum Stocks Attack: Green Mountain Coffee (GMCR)

Investors in Priceline (PCLN), Netflix (NFLX), Baidu (BIDU) and the like are enjoying the best of times - these have become the classic momo stocks. (I am leaving out the las vegas casinos, commercial real estate stocks, and just about any US retailer who also now appear to be in this pantheon)

Momo investing is fun and relatively simple. It's the greater fool theory - buy high, and sell higher. Valuation is for wimps. It is among the most popular investing strategies nowadays & hard to argue with since it works. Until it doesn't.

Green Mountain Coffee (GMCR) has become one of these momo stocks, but finally last night expectations had reached the point the company could not deliver on. And today we see what happens when the music stops in the momo dance hall.

With that said, if you use technical analysis, your warning sign to either get out or at least reduce exposure actually came a week ago Tuesday, when the stock broke support (50 day moving average) on huge volume. If you believe Caesars New York City is all about malfeasance and specific groups with access to information before the masses... this was your sign.
  • Shares of Green Mountain Coffee Roasters Inc. tumbled Thursday, a day after the coffee seller posted a third-quarter outlook that fell short of Wall Street estimates. On Wednesay, the Waterbury, Vt., company said it expected third-quarter earnings of 50 cents to 54 cents per share before a 3-for-1 stock split, and earnings of $1.95 to $2.05 per share for the year. Analysts polled by Thomson Reuters had expected profit of 57 cents per share in the third quarter and $2.04 for the year.

While I respect American's right to love coffee, the 50x forward valuation seemed a bit rich but you could of said that at 45x...40x... etc. Valuation means nothing nowadays. Until it does.

This is how all good momo stories end.... eventually analysts behind the ball and constantly underestimating estimates, will finally raise numbers to a point that even companies executing well (as GMCR is) cannot keep up. Then the lemmings jump.

No position

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