Shares of Green Mountain Coffee Roasters (Nasdaq: GMCR) plunged after fourth-quarter financial results fell short of analyst expectations, giving short-sellers including Greenlight Capital’s David Einhorn additional reasons to be bearish on the stock.
Since alerting Wyatt Investment Research readers of concerns about GMCR shares, the stock has fallen 50 percent. Three weeks ago Daily Profit editor Ian Wyatt was attending the Value Investing Congress investor conference in New York, where he listened to renowned hedge-fund investor David Einhorn detail his bearish outlook for Green Mountain Coffee Roasters shares in a 110-slide presentation.
In the Daily Profit newsletter from Wyatt Investment Research, Ian chronicled Einhorn’s bearish case for the Vermont-based coffee company that has become a favorite holding of growth investors.
In his article titled, “Greenlight Capital’s David Einhorn Favorite ‘Short-Sell’ is Green Mountain Coffee (GMCR),” Ian shared his thoughts on the presentation and announced that he was personally short-selling the stock.
“Einhorn's research indicates that Green Mountain Coffee has already achieved significant market penetration and that the addressable market may be smaller than forecast by the company and bullish analysts,” Ian wrote.
That article is looking quite prophetic today – as is Einhorn. For the first time in two years, Green Mountain Coffee reported earnings that fell short of analyst expectations.
The specialty coffee company reported impressive sales growth of 91 percent for the fourth quarter ending September. However, its $711.9 million in revenue for the quarter was nearly $50 million less than the consensus analyst estimate. Meanwhile, earnings tripled to $75.4 million, but EPS of 47 cents per share also fell short of expectations.
Not everyone shared those expectations, however. Einhorn, who earned a name for himself by forecasting the Lehman Brothers collapse several years ago, was one of the first and most vocal critics of Green Mountain Coffee Roasters.
Ian reported that Einhorn told his Value Investing Congress audience that Green Mountain’s sales of its Keurig coffee brewing machine were slower than expected and that sales growth of the popular single-serve “K-Cups” that go with it was actually declining. Einhorn accused GMCR of shady accounting – something the SEC has been investigating for more than a year.
As part of his research, Einhorn had spoken with numerous current and former Green Mountain Coffee employees, who alleged that the company artificially inflates its earnings by shipping K-Cups and Keurig machines between its own facilities. By doing so, the company was booking revenue in an attempt to beat quarterly earnings estimates.
After reviewing GMCR’s fourth-quarter earnings report, Ian said, “While Green Mountain posted impressive growth in the quarter, it failed to keep pace with the rosy expectations that have become the norm. The short fall only added fuel to the fire, giving short sellers more reasons to sell the stock. Meanwhile, long-time GMCR shareholders are now questioning whether now is the time to get out of this stock.”
An increasing number of investors are now betting against Green Mountain Coffee Roaster shares. Currently, 21 percent of the company’s publicly available shares have been sold short.
Is it just a coincidence that GMCR missed on its estimates this quarter after Einhorn accused them of cooking the books? We may never know. CEO Lawrence Blanford, for his part, claims that the fourth-quarter revenue and earnings shortfall is not related to an accounting issue.
Since yesterday’s earnings announcement, shares of Green Mountain Coffee have been in a freefall. In mid-day trading today, the stock was down 37 percent and trading at $42. Shares have fallen more than 60 percent from its 52-week high of $115.98 – a shocking fall from grace for a stock that has outperformed Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) in recent years.
Full Disclosure: Ian Wyatt is currently “short” shares of Green Mountain Coffee Roasters (Nasdaq: GMCR).