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. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  2. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  3. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  4. Investing

    How to Spot Secular Bull Markets vs. Secular Bear Markets

    A guide to identifying secular bull and bear markets.
  5. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  6. Financial Advisors

    Bull vs. Bear Markets: How to Be Prepared for Both

    Bull and Bear Markets are a reality that every investor must be prepared for. Here are a few tips.
  7. Investing

    What’s the Difference Between Duration & Maturity?

    We look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.
  8. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  9. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  10. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  1. Can working capital be depreciated?

    Working capital as current assets cannot be depreciated the way long-term, fixed assets are. In accounting, depreciation ... Read Full Answer >>
  2. Do working capital funds expire?

    While working capital funds do not expire, the working capital figure does change over time. This is because it is calculated ... Read Full Answer >>
  3. How much working capital does a small business need?

    The amount of working capital a small business needs to run smoothly depends largely on the type of business, its operating ... Read Full Answer >>
  4. What does high working capital say about a company's financial prospects?

    If a company has high working capital, it has more than enough liquid funds to meet its short-term obligations. Working capital, ... Read Full Answer >>
  5. How can working capital affect a company's finances?

    Working capital, or total current assets minus total current liabilities, can affect a company's longer-term investment effectiveness ... Read Full Answer >>
  6. What can working capital be used for?

    Working capital is used to cover all of a company's short-term expenses, including inventory, payments on short-term debt ... Read Full Answer >>

You May Also Like

Trading Center