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. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing

    Don't Freak Out Over Black Swans; Be Prepared

    Could 2016 be a big year for black swans? Who knows? Here's what black swans are, how they can devastate the unprepared, and how the prepared can emerge unscathed.
  4. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  5. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  6. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  7. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  8. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  9. Stock Analysis

    Analyzing Sirius XM's Return on Equity (ROE) (SIRI)

    Learn more about the Sirius XM's overall 2015 performance, return on equity performance and future predictions for the company's ROE in 2016 and beyond.
  10. Stock Analysis

    Will Virtusa Corporation's Stock Keep Chugging in 2016? (VRTU)

    Read a thorough review and analysis of Virtusa Corporation's stock looking to project how well the stock is likely to perform for investors in 2016.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  3. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  4. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  5. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  6. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center