Why I'm Staying Away From Green Mountain
Green Mountain's (NAS: GMCR) troubles just keep piling up. In a recent development, the coffee maker removed Robert Stiller, the founder and chairman of Green Mountain, and lead director William Davis from their respective posts. The reason? Both were thumped with margin calls resulting from Green Mountain's shares plummeting 40% last week, which made it necessary for them to sell their Green Mountain stock.
Once the board got wind of the trade, they probed further and it was found that the deal was made "at a time when the trading window in GMCR stock was closed" and that the stock sales were "inconsistent with its internal trading policies." Green Mountain issued a statement saying, "The board determined that it was in the best interest of the company and its shareholders for Mr. Stiller and Mr. Davis to relinquish their leadership positions on the board as well as their committee roles."
The mysterious Mr. Market
Stiller served as CEO of Green Mountain until 2007, when he resigned from the post and took over as chairman. The man became a billionaire when Green Mountain's stock skyrocketed last year. Its shares were trading near $5 in 2006, when the company bought Keurig, and gradually reached the $30 mark by 2010. As the popularity of Green Mountain's famed Keurig brewer rose, so did the company's stock, breaking the $100 barrier last year. Since then, the stock has nosedived, from an all-time high of $115.98 last year to somewhere below the $30 mark, at which it is trading now.
Investor Whitney Tilson said that Green Mountain's situation reminded him of that of Krispy Kreme Doughnuts (NYS: KKD) . The doughnut maker's stock fell from an all-time high of $50 to as low as $5. Interestingly, Stiller owned a stake in Krispy Kreme too, about 12%! But that stake was sold off, likely to pay for the margin call.
Green Mountain's stock has been on the decline ever since renowned hedge fund manager David Einhorn made a bearish call on the company, as he questioned its accounting practices as well as its expiring patents. The looming patent expiry, along with Starbucks' (NAS: SBUX) announcement of a single-serve device on the horizon, have just made things worse for the beleaguered company. Fellow Fool Austin Smith has tried to warn investors for a while now that the stock may have run its course as an investor favorite. In an earlier article, I also warned that Green Mountain's fairytale revenue growth may just be over.
During its recent earnings call, Green Mountain slashed its sales growth outlook from 65% to 50%, which led to its shares plummeting by 40%. At the same time, Starbucks' decision to enter the market where the Keurig brewer rules the roost is definitely a point of concern. Starbucks claims that its brewer, called the "Verismo," is not intended to rival the Keurig brewer, and it aims to directly compete with Nestle's coffee machine instead. But isn't the world's largest coffee purveyor's entry into the market a tad worrisome? After all, do you really expect people drinking Starbucks' Verismo-made drink to have a K-Cup immediately after? I highly doubt it.
Green Mountain has been burned by short-sellers and has lost a considerable amount of value. Would you stick with it? What I'm going to do is watch this stock from the safety of the sidelines. You can do the same with the help of our free Watchlist service.
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At the time this article was published Fool contributor Shubh Datta doesn't own shares in the companies listed above. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters and Starbucks. Motley Fool newsletter services have recommended writing covered calls on Starbucks and creating a lurking gator position in Green Mountain Coffee Roasters. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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