4/22/12
This
coming week is going to be very important for the markets as Apple reports
earnings on Tuesday afternoon, in what should be a make or break report for the
entire stock market. Of the last
week, Apple dropped 5% and you saw the impact the stock has on the entire
market…where Apple goes, so goes the stock market. We’ll also get earnings this week from Exxon Mobile, Boeing,
Arm Holdings, Texas Instruments and many more. Additionally, we’ll get an update from the FOMC on their
interest rate decision on April 25th.
The
stock I am recommending this week is one that has been getting slammed for
almost an entire year so it is also my speculative stock of the month, but I
think is now a low risk buy, Green
Mountain Coffee Roasters (GMCR).
For those who don’t know, they engage
in the specialty coffee and coffee maker business. The company sources,
produces, and sells approximately 200 varieties of coffee, cocoa, teas, and
other beverages in K-Cup portion packs and coffee in traditional packaging. Most recently, the stock got hit hard
when Starbucks announced they are making a competing coffee maker that will
also allow users to make espressos.
However, at the same time, Starbucks announced an extended contract with
Green Mountain to continue selling K-cups for the Keurig Coffee Maker. The biggest reason analysts are so
negative on the stock is that the company has two key patents that expire in
September, and it’s unclear how much that will hurt the stock. My opinion is that this isn’t anything new
and that it’s already baked into the stock price. Furthermore, the company has been riddled with accounting
problems, which is never a good thing for the stock. But again, I think that’s already in the stock price.
As
much as there are bad things about GMCR, there are also a number of
positives. Late last year, the
average analyst earnings estimate was for GMCR to earn $2.38/share. However, that was recently raised to a
consensus of $2.67/share, a 12% increase. The stock is extremely cheap compared to its past P/E
ratio, as it currently is trading at a measly 12x 2012 earnings and a
Price-to-Earnings growth rate of just .50. With a market capitalization of $6.85B, Green Mountain is
growing quarterly revenues by more than 100% and earnings by over 4,000%. The company has $84M in cash and a little
over $400M in debt. What’s
interesting to note, despite all the negativity surrounding this name, analysts
still have 9 buys, 2 holds and 1 sell on the stock. So while there are some holes in the Green Mountain story,
the balance sheet is very strong, the stock remains very cheap, and as I will
point out shortly, the technicals indicate the stock may have bottomed at
$40/share.
As
I stated earlier, what attracted me to this stock is the low risk entry level,
with the stock closing at $44.26 on Friday (a good entry point for this
stock). The 52-week low is $34.06,
but the lowest close was last November at $40.89, which is where I think you
can put your stop, risking just 8% to the downside. Now, where this get’s interesting is my interpretation of
the charts to the upside. Looking
at a long dated weekly chart, $40.86 has been the floor for more than 2 years,
and since breaking through that price in February of last year, the stock has
put in a failed triple bottom, which is a very bullish technical
formation. (A failed triple bottom
is when a stock trades down to the same price level three times, but fails to
fall through that level. It’s an
indication that the stock has strong support and should be used as a
floor). Additionally, when the
stock traded down to its 52-week low of $34.06, it completed a 5th
wave down, indicating the stock is sold out. Looking at the Relative Strength Index (technical indicator
that determines overbought/oversold conditions), GMCR has an RSI of 38, with 30
marking oversold conditions.
Currently, analysts have an $85 price target for the stock, which I
think is way to high. I’m looking
for a move back to $54, which is slightly above the 50 day moving average and
23.6% Fibonacci retracement, and good for a 22% gain from Friday’s close. Green Mountain reports earnings on May
2 so if you’re really worried about the downside, you can hold off, but again,
you have a low risk entry right here and with such a large short interest in
the stock (22%), any beat by the company will skyrocket this stock.
Full
disclosure: I currently hold no positions in GMCR.
Jeff Lewison
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