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Who is defying The “D” word

Published on May 14, 2009

Who is defying The “D” word

May 14, 2009

gmcr-10-yr-chartIn such a market when almost every other counter is falling apart, it’s hard to imagine that there might be a company that is defying gravity day after day. It has rounded-up 78X returns since the great bull started in Oct 1998. Talk about technical indicators and everything is probably going to tell you, it’s overbought, and by the way, it has been so for time and again, dare you touch it?

And last guess who might be defying the “D” word, a Coffee company, check them out here.

Green Mountain Coffee Roasters, Inc. (GMCR) is engaged in the specialty coffee industry. The Company sells over 100 whole bean and ground coffee selections, hot cocoa, teas and coffees in K-Cup portion packs, Keurig single-cup brewers and other accessories. The Company manages its operations through two business segments, Green Mountain Coffee (GMC) and Keurig, Incorporated (Keurig). GMC sells whole bean and ground coffee, hot cocoa, teas and coffees in K-Cups mainly in domestic wholesale and retail markets, and directly to consumers. In addition, GMC sells Keurig single-cup brewers and other accessories primarily directly to consumers and to supermarkets. The majority of GMC’s revenue is derived from its North American wholesale markets

Zacks has a buy list. It is a company that has been growing topline rather spectacularly (check out the financial figures here ) All nice!. Trading at about 50 times this year’s expected earnings, and about 40X next year’s earnings. Amazing performance by almost any standards. When best of the breed are trading in their teens, GMCR is sky rocketing. Fantastic.

Hold on for a moment, the coffee company’s founder Chairman Robert Stiller has amassed his fortune, he sold nearly 200,000 shares for $14.6 million of the skyrocketing stock. Though he continues to own 4 million shares, representing a 16.1% stake, but still the last price sold was 80% more than what he got just two months back in March by selling another 200,000 for about $40. Don’t conclude too much from the sell as he has been selling time and again for sometime. You may track his previous sells here, but I think this time he probably has judged correctly that there are better bargains than GMCR now as the markets are correcting (my way of fun).

Bottom Line, I am not with Zacks’s perspective and I would like GMCR for a bearish play. I don’t exactly know when will the fall start, and therefore I have two strategies to play.

  • First one is similar to covered call, but let me call it covered put. It is like a Put diagonal spread where I am buying the leap put and selling the current month’s OOM puts, and then roll it over. For instance, I may choose to buy the Dec’09 $75 puts for $16.70 per contract and then sell June 70 Put for 4.20 bringing my net to $12.50. My break-even till Jun will be $58 and $86. However, I not going to wait till then, as soon as I am done with my theta gains, I shall be rolling (I’ll have Jul to Nov and then final one Nov/Dec sell). One needs to nimble though, in case it starts move strongly in any direction (watch-out will be exceptional gap-up or gap down), I may play intraday as well, by selling (or buying) one and then buying (or selling) it back. This strategy allows me to be incorrect.
  • Second strategy is rather simpler. In this case I might choose a June (an example) 75/65 put debit spread. the risk/reward ratio will be 1:2. But then there is not much room for error. Once may eliminate that risk by choosing outer months, but it has less room for error than the first strategy.

There may be more and more strategy, bear call spread, OOM calendars, OOM butterfly, strangle/strangle swaps etc, but I am not so much excited about other strategies (for my style).

Disclaimer – This company is in a very strong move up and I am talking contrary to market, you may lose money using my perspective. I currently do not own anything in the GMCR, but I may open/close any type of positions any time. Pls do your due diligence before investing even a single cent.

Profitable Trading, OP

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