This week concluded the semi-annual presentation of the Value Investing Congress in New York City. The event is a two-day gathering of investors who eagerly hear presentations by notable investors. Greenlight Capital manager David Einhorn was one presenter and he was touting his current bearish pick: Green Mountain Coffee Roasters (Nasdaq:GMCR). (To learn more, check out Profiting From Stock Declines: Bear Put Spread Vs. Long Put.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Roasting Profits ...
While I lack the details, Einhorn is far too savvy an investor to bet against a stock merely on valuation purposes. GMCR currently trades at around $69 a share, or 67 times trailing earnings and about 6 times book value. Green Mountain is the main company behind the increasingly popular Keurig single-cup coffee machines. These machines require users to purchase K-cups, which are the single serve cups that allow people to brew a single cup of coffee without measuring coffee or using a filter. To be sure, GMCR has experienced rapid growth over the past several years. From fiscal 2008 to fiscal 2010, sales have grown from just under $500 million to over $1.3 billion while profits have surged from $22 million to nearly $80 million. That growth is expected to continue, with profits expected to almost double in fiscal 2011 and excitement about a deal signed with coffee giant Starbucks (Nasdaq:SBUX) earlier this year.

... or Brewing Shenanigans
Einhorn's case doesn't hinge on valuation alone but rather accounting and other issues about the future growth of this company. Despite earning more and more profits, GMCR is not generating any free cash flows as the company continues to invest heavily in cap ex. Einhorn is also concerned about patent expiration of the company's cash cow, the high margin K-cups. Absent a patent, GMCR will face enormous competition from large food business like Kraft (NYSE:KFT) who would enter to market to bolster its own coffee sales. In addition to patent loss, Einhorn also cited accounting issues. Einhorn's approach and detail is very similar to his previous bet against Florida landowner St. Joe (NYSE:JOE). So far, Einhorn has been right on both fronts. St. Joe trades for under $15 a share, well below the mid $20s price that Einhorn placed his bet. GMCR shares have responded quickly as well. At the beginning of the week, the stock traded above $90 a share. Today, shares trade for $67, giving Einhorn a tidy quick return on paper.

The Bottom Line
Whether Einhorn's ultimate thesis proves right or wrong, his trade has worked. He may be slowly closing out his trade given the share decline and the nearly 50% gain he's sitting on. To be sure, some analysts are disputing his rationale and see significant growth ahead for GMCR, which in the short run could cause the shares to pop up again. Don't attempt to try this at home without understanding the consequences first. (For more on shorting a stock, read When To Short A Stock.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Economics

    Understanding Cost of Revenue

    The cost of revenue is the total costs a business incurs to manufacture and deliver a product or service.
  2. Economics

    Explaining Carrying Cost of Inventory

    The carrying cost of inventory is the cost a business pays for holding goods in stock.
  3. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  6. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  9. Investing

    How To Calculate Minority Interest

    Minority interest calculations require the use of minority shareholders’ percentage ownership of a subsidiary, after controlling interest is acquired.
  10. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Surplus

    The amount of an asset or resource that exceeds the portion that ...
  6. Cash Flow

    The net amount of cash and cash-equivalents moving into and out ...
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>
  5. Why can additional paid in capital never have a negative balance?

    The additional paid-in capital figure on a company's balance sheet can never be negative because companies do not pay investors ... Read Full Answer >>
  6. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!