Green Mountain Coffee Roasters (GMCR) is enjoying one heck of a ride today, after the company reported earnings for the second quarter that were by all accounts outstanding. There is no doubt that Green Mountain’s growth potential has not yet been tapped out. The second quarter saw the company report earnings of $.50 per share on extremely strong sales of $193 million. The analysts were blind-sided by the incredible growth of Green Mtn. as they had only anticipated 36 cents of earnings on sales of $178 million. Granted the analysts were already anticipating strong growth compared to a year ago, but that analysis was in fact out to be far to limited.
The stock has rocketed up nearly 40% today, well above its all time highs. Much of the volatility seems to be a text book short squeeze as coming into the day more than 50% of the shares were held short. These short sellers were counting on a let down in today’s numbers, but instead they got the opposite. The result is a lot of shorts abandoning ship and the amazing quarter is attracting new interest from buyers as well. The result is a surging stock price.
For those of you who are long on GMCR, congratulations on picking on of the top performing stocks over the last six months. The stock has tripled since hitting its low in October. However, in our view this stock seems due for a pull back over the next few weeks. This is unbelievable growth even in an favorable market, but in this market we think it wise to pull profits off the table when the opportunity presents itself. In the case of GMCR, the growth has been fantastic, but even after raising full year EPS guidance the stock is now trading at a huge premium to market. Using the current price and mid range of expected full year 2009 earnings, the P/E multiple of 48x. That is tough to justify, especially if you have already missed the nearly 40% pop today.
We had Green Mountain Coffee Roasters coming into the week at Fairly Valued , and after the price action this week it is very possible that next week it will necessitate a downgrade to Overvalued. There is no doubt that this is a growth story with little compare in this market, and a new distribution deal signed with WalMart (WMT) today will not hurt at all. But investors need not be greedy and as rich a P/E multiple as they are pulling now is substantial. Proceed with caution on Green Mountain because investors buying in near the top of a major rally so often get burned.