How Green Mountain Roasted My Returns

Worldwide Invest Better Day 9/25/2012
Worldwide Invest Better Day 9/25/2012

Before I knew The Motley Fool was more than just a Shakespeare character, I used to play a risky game called "beat the market." Back in March, Green Mountain Coffee Roasters (NAS: GMCR) was one of the hottest stocks on the market, and I thought I could ride its Wall Street roller coaster all the way to massive returns. Instead, I managed to derail my already shaky plan and piddled away profits in the process. Here's my story.

Ready, set, lose!
Back on March 9, Starbucks (NAS: SBUX) announced that it would be introducing its own single-cup brew machine. For the overcaffeinated king of coffee, this was a relatively straightforward and sensible business move. But for Green Mountain Coffee Roasters, this announcement spelled disaster for its signature K-Cup single-serve coffee machine. The company's stock dropped 15% that day and another 5% the next trading day.

GMCR Chart
GMCR Chart

GMCR data by YCharts

Thinking that the market had drastically overreacted, I bought in. Here's my investment note from that day:

Took a ~20% hit when Starbucks announced that it was selling a k-cup coffee machine, which may affect long-term viability of GMCR but not short-term continued growth. Sell QUICK once the scare is over, but before Starbucks starts to take market share. 3/13/12

Source: Author's personal investment notes.

Things fall apart
Over the next few days, Green Mountain's stock did bounce back. On March 21, my shares were up 11%, and I considered myself a stock market genius. I had wagged my finger at Mr. Market's short-term thinking and had made a pretty penny in the process. But I didn't sell. I got greedy and kept on waiting for Green Mountain's comeback to fly my stocks even higher. In other words, I did not "sell QUICK."

As I watched my profits disappear, I began to actually investigate the company itself. Its K-Cup patents were set to expire in six months, hedge-fund operator David Einhorn had questioned Green Mountain's finances, and there were even allegations of insider trading by the company's founder and chairman.

I set a goal for when I would sell. A 5% profit seemed sufficient, but my shares kept dipping. By the end of March, I was simply hoping to cash out at no loss.

GMCR Chart
GMCR Chart

GMCR data by YCharts

Finally, on April 3, I pulled the plug and wrote my autopsy investment note:

Should've sold when it bounced back up after the SBUX announcement, but held on for too long. Started to get messy with insider trading and high competition, figured my money would be better used elsewhere if I cut the losses now. Final loss was -12.56%. 4/3/12

Source: Author's personal investment notes.

Lessons learned
Nearly five months and a whole lotta Foolish wisdom later, I can look back and identify three mistakes and lessons from my rookie investment move:

  1. I got in for the wrong reason. Green Mountain came across my radar because of a market event, and I bought it as a reaction. I didn't believe in (or even know much about) the company and was just trying to play the market.

  2. I wasn't in it for the long haul. My plan from the start was to cut and run, a dangerous practice that rarely turns out well for investors. Timing a market is near impossible, and I failed on my first attempt.

  3. I got greedy and ignored my own advice. Flawed as my plan was, I still had one. But an already bad investment became even worse when I deviated from my instructions and stuck with my shares after my investment thesis had gone from sour to rotten.

The interesting thing about an investing story is that there's never an end. Green Mountain Coffee Roasters suffered mightily at the beginning of this year, but its stock has risen nearly 80% since August.

Even as its patents are set to expire, its K-Cup offerings have expanded to include Starbucks, Caribou Coffee (Nadaq: CBOU), Dunkin' Brands' (NAS: DNKN) , Dunkin' Donuts, and J.M. Smucker's (NYS: SJM) Folger's coffee. On the surface, these companies are competitors fighting to serve their own cup of joe to every caffeine addict around. But if Green Mountain plays its cards right, its competitors can continue to enjoy profits, with K-Cups acting as a lucrative medium for each company's special roast.

Green Mountain may have been the worst stock investment of my life, but it could one day be my best. Learn from my mistakes (I have!) and join us on Sept. 25 in celebration of The Motley Fool Worldwide Invest Better Day.

To help develop your own Green Mountain investing thesis, be sure to check out Motley Fool analyst Austin Smith's special premium report. It outlines both the opportunities and risks for this coffee company, as well as what to expect once Green Mountain's patents expire. It comes with a full year of free updates and is available for a limited time only, so be sure to pick up your copy today.

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Fool contributor Justin Loiseau has no position in any of the stocks mentioned in this article. The Motley Fool owns shares of Starbucks and Green Mountain Coffee Roasters.Motley Fool newsletter serviceshave recommended buying shares of Green Mountain Coffee Roasters and Starbucks, writing naked calls on Dunkin' Brands Group, creating a lurking gator position in Green Mountain Coffee Roasters, and writing covered calls on Starbucks. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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