T2 Partners Long Netflix (NFLX), Still Short Green Mountain Coffee Roasters (GMCR)

Two of the stock market’s biggest success stories have been in full-on freefall mode recently.

Netflix (Nasdaq: NFLX) and Green Mountain Coffee Roasters (Nasdaq: GMCR) have lost a combined $23 billion in market capitalization over the last few months. At $86.76, Netflix is trading at less than a third of its 52-week high of $304.79. Meanwhile, Green Mountain Coffee Roasters has plummeted more than 60 percent in the last two months, falling to $42.14 at the close of business Monday.

According to T2 Partners LLC., one of the two tail-spinning stocks is due for a reversal, while the other stock’s troubles may be just beginning.

In its “Value Investing Newsletter” published Sunday night, T2 Partners revealed that it is long Netflix but remains short Green Mountain Coffee Roasters even after its recent freefall. Both stocks are cheap at the moment. But T2 Partners believes that Netflix’s recent nosedive is a temporary dip due strictly to its recent price hike and botched attempt at creating a second website, Qwikster, for its streaming video business. Despite the bad publicity and recent ridicule of CEO Reed Hastings, Netflix remains a solid business, T2 said.

“Ultimately, we think Netflix is an excellent company and that the market has overreacted to all of the recent negative news,” T2 said in its newsletter.

Green Mountain Coffee Roasters, on the other hand, has myriad problems that don’t bode well for the future of its stock. Daily Profit editor Ian Wyatt documented many of those problems in an article last month, saying that he would be personally short-selling Green Mountain Coffee stock. Three weeks later, the stock had fallen 50 percent.

GMCR’s precipitous drop isn’t over yet, says T2 Partners. Its problems still linger, which is why Green Mountain stock remains T2 Partners’ largest short position.

The firm’s reasons for continuing to short GMCR include:

  • The expiration of two key patents next September, which will open the door for more competition with its popular Keurig single-serve brewer and K-Cups.
  • An ongoing SEC investigation into the company’s accounting practices.
  • Its $7 billion market cap, a price tag that makes future acquisitions unlikely.
  • Green Mountain’s high capital expenditures and almost nonexistent cash flow.

GMCR has $561 million in net debt, operating cash flow of a mere $785,000 over the past 12 months, and free cash flow of minus $282 million. It can thank its $1.4 billion spent on acquisitions over the last two years for that. Furthermore, as it announced in its fourth-quarter earnings report, Green Mountain plans to spend between $630 million and $700 million more on capital expenditures in fiscal 2012. And that’s not including money it may have to spend on legal fees to defend itself against an intensifying SEC inquiry.

In contrast, T2 Partners points out that Netflix has no such problems. There are no SEC investigations, no expiring patents and no cash flow problems. Netflix has $166 million in net cash, $349 million in operating cash flow, and $201 million in free cash flow. Its problems have more to do with recent public backlash against its price hike and ill-advised flirtation with Qwikster. Though the bad publicity did cost the company close to a million subscribers, Netflix still has 23.8 million subscribers and its streaming video business is growing 30 to 40 percent annually, T2 Partners estimates. Plus, there are few serious threats to the streaming video side of Netflix’s business. Hulu Plus is its closest competitor, with one million subscribers – less than 5 percent what Netflix has.

In other words, T2 Partners sees a bright future for Netflix despite its recent slip-up. For Green Mountain Coffee Roasters, however, its troubles are still brewing.

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