There Are Two Sides to Every Story Stock

The best thing about our decision to open up comment boxes at the
end of our articles is that you often get some stimulating perspectives
from both the bullish and the bearish camps of a particular stock.

Reader reggidmalc chimed in on the bullish side:

Green Mountain is a Peter Lynch winner based on personal experience
...we have 3 Keurigs in our B&B and the guests love them. Great
brewer and great coffees, teas and hot chocolate. Oh, and by the way a
low capital, razorblade business model. Imagine how they will grow when
the Tully's/West Coast market comes on stream.

Whereas kurtdabear checked in with a bearish thesis:

GMCR stock will probably do more to keep you awake nights over the
next few years than their coffee will. They have an astronomical PE, no
dividend, and trade at many multiples of book value. On top of that, a
score of insiders have recently bailed out of nearly a million shares.
More than likely, the reason the stock is sitting at a 52-week high is
that it's in a short squeeze since over half the float is currently
being shorted.

And what about that booming business? With travel diminishing, hotel
rooms going vacant, offices and plants closing, lay-offs rising, and
commercial vacancies skyrocketing, how fast do you think their
commercial receipts are going to be growing?

Also, with high-end retail and luxury purchases tanking even among
well-off consumers, how much growth do you think they're going to see
in their retail machines and products?

Anyone planning to make money on this stock had better be voting with the short-sellers.

I disagree with "da bear"
Since I'm a bull on
the company, I felt vindicated by the bullish perspective from a
bed-and-breakfast owner who swears by the machines. I also felt
respectfully challenged by the bearish angle.

It's worth a response, so let me have at it.

Let's tackle the valuation arguments first. Does Green Mountain pack
an "astronomical" earnings multiple? It's relative. Yes, Green Mountain
is trading at 40 times this fiscal year's projected profitability of
$1.31 a share, but it's also growing its bottom line at a 50% clip on
an annual basis. Look out to fiscal 2010 (which starts in October) and
the forward earnings multiple falls to 31.

This also assumes that Green Mountain simply meets expectations. It
has handily beaten analyst expectations in each of the past four
quarters, and by 19% to 33% in the three most recent periods. Clearly,
Wall Street is underestimating the company's earnings power.

As for the lack of a dividend, it doesn't sway me. Some of the greatest growth stocks, such as Google (Nasdaq: GOOG) and Apple (Nasdaq: AAPL), don't pay out quarterly distributions. Even the java bellwether Starbucks
(Nasdaq: SBUX) -- the company that Green Mountain is crushing with its
convenient and cost-effective brews -- doesn't squeeze out a dividend.

Green Mountain also commands a steep price-to-book value ratio, but
that is no surprise. It's a lean cash-generating machine, collecting
royalties on every K-Cup sold from third-party coffee companies such as
Caribou (Nasdaq: CBOU) and Diedrich Coffee (Nasdaq: DDRX). It doesn't need a "mountain" of assets.

More counterpoints
Kurtdabear is concerned
about the insider selling at Green Mountain, but this has always been
the case. Executive compensation is based largely on stock options, and
officers have had a habit of cashing out for years. The fact that the
stock recently hit an all-time high despite years of insider selling
should tell you how effective an indicator short-selling is with this
company.

He also feels that a short squeeze is behind the stock's run, but I
dismiss that. There are 9.7 million shares sold short as of the end of
March, more than double the shares held short a year ago. If anything,
we have yet to see the short squeeze. When it comes, it will be an even
meatier rally.

Finally, he is concerned about the recession's impact on the
company. He is right that travel is dwindling and that offices are
laying off employees. All these factors do is provide impetus to the
multiplication of Keurig machines, as they spread from office break
rooms to individual home units. I should know. I've had a Keurig at
home for nearly two years.

The K-Cups cost less than $0.40 apiece, essentially the price of a can of your typical soda from Coca-Cola
(NYSE: KO), but with higher perceived value. It is not a coincidence
that during last year's horrific holiday season for retailers Green
Mountain moved 711,000 K-Cup brewers, a 121% spike over the previous year's quarter.

So not only are folks buying Keurig machines as a cheaper
alternative to heading out to Starbucks, but the company should have
amazing built-in demand for K-Cup refills over the next several
quarters.

So I want to thank "kurtdabear" for the inspiring bearish argument.
As an investor, you will always learn more from those who disagree with
you than those who agree. However, I stand just where I began.

Starbucks may still have some fans, but not me:

Warm Up to Green Mountain Coffee RoastersI Can Make You Rich in 3 YearsDo You Still Own This Garbage?

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