GMCR: Too Far Too Fast, We Re-Short, But Define Our Risk In Dec Exp.

by Dan November 17, 2011 10:48 am • Commentary

New Thoughts: Since last Friday’s apparent near term low, following the company’s disappointing earnings, GMCR has rallied almost 33% from an extreme oversold condition.  The stock opened up 2-3% this morning and appeared to top out right above 55.00.  The price action this morning with the reversal appears to me to be a near term top.   The 4 day rally also appeared to be a short covering, possibly competing with some bargain hunters.   Near term there could be an opportunity to play from the short side for a  50% re-tracement of the move off the last weeks lows. Here’s the new trade:

TRADE: GMCR ($52.60) Bought Dec 50/46 Put Spread for 1.55

-Bought 1 Dec 50 put for 4.20

-Sold 1 Dec 46 put at 2.60

Break-Even On Dec Expiration:

profits btwn 48.45 and 46 make up to 2.45, max gain nof 2.45 46 or below.

losses btwn 48.45 and 50 lose up to 1.55 and max loss of 1.55 at 50 or above

TRADE RATIONALE: options are very expensive and I want to get some short exposure as I think the stock might have just topped out.  I will probably buy more of the DEC 50 puts and leg into the 46s or a lower strike as the stock comes in……this thing has gone too far to fast off of the bottom and any whiff of the SEC stepping up their on going investigation and this thing is toast. 

 

Original trade and updates below:

Update Nov 9th 2011 at 2:09: I Just ran through Einhorn’s presentation   (read here) from cover to cover since writing up the previous post, and I got to tell you this thing could come to head on the call tonight.

Einhorn’s suggestions of impropriety are serious:

• Reduced and ever-changing transparency and disclosure

• Aggressive acquisition accounting

• Unexplained levels of capital spending

• Peculiar relationships with quasi-captive distributors

• Puzzling behavior uncovered by field research

• Poor financial controls and ongoing SEC inquiry

Aside from the suggestions about  business practices, insiders have been selling stock aggressively ($172 million worth) in a year that the company sold $698 million in a secondary offering to new and existing shareholders.  

I can’t speak to the accuracy of his claims, as the only thing I have done is read his presentation, but for a guy like Einhorn to be this public about his views on such an insignificant company in the grand scheme of things only leaves me to believe that where there is smoke there is fire.

This thing could come to a head on the call tonight….I would imagine that GMCR will not take questions from Einhorn or his people, but I would expect that he has planted a handful of questions with Wall Street analysts that will be allowed questions.  If the company does not adequately answer the most direct and serious claims then the stock will have a hard time going higher even if they beat and raise.  If the stock trades up initially as a result of the high short interest I would guess that stocks sells off after the gap.  This thing stinks of a NFLX sort of move……

MY BEARISH TRADE:

GMCR $67.50 Bought Nov11 weekly 60/55 Put Spread for 1.25

-Bought 1 Nov11 weekly 60 put for 2.65

-Sold 1 Nov11 weekly 55 Put at 1.40

Break-even on Nov11 weekly Exp:

Profits btwn 58.75 and 55 make up to 3.75, below 55 make full 3.75

Losses btwn 58.75 and 60 lose up to 1.25 and max loss is 1.25 above 60

TRADE RATIONALE: I obviously have no smoking gun but this story smells like day old coffee with rotted out non dairy creamer.  I want to make a low premium bet (the options are crazy expensive, see more details below in previous post) that the stock can realize the implied move to the downside.   This is a medium conviction trade piggybacking Einhorn’s high conviction analysis.  I am risking what I am willing to lose…..break-even is down 12% so u need to get direction right and more than the implied move to make money.

 

Original Post Nov 9th, 2011 at 1:23pm: GMCR Report Fiscal Q4 Tonight: Collars Could Make Sense Against A Long

Green Mountain reports Fiscal Q4 earnings tonight after the bell and the options market is implying about a 16% move vs the 4 qtr avg move of about 15%.

-Tonight’s conference call will be one of the first times that management will have the opportunity to address hedge fund manager David Einhorn’s accusations of accounting irregularities (read presentation here).

-Wall Street analysts generally fairly positive on the name with 10 Buys, 2 Holds and 1 Sell.

-Short interest is high at about 14% of the float

-the stock is up a whopping 107% ytd, but down about 40% from the all time highs made in early September.

-earnings and sales have been growing 50, 60. 70% at a clip for the last few years and are expected to be above 100% at the conclusion of this fiscal year.   The valuation of the stock clearly reflects that, trading at 52x this year and ~40x next years expected earnings.

From a Technical standpoint the fever has clearly broken and if you were looking for any real support in this stock it could be in the low 60s, a range where it consolidated early this Spring before making its monstrous move higher that almost saw a double in the stock int he ensuing 5 months.

MY TAKE: I think you have to be crazy to buy this stock regardless whether you question Einhorn’s motives as he is obviously talking his book in a major way.  If the company’s accounting practices are on the up and up then they have every incentive in the world to try to stick to this guy and create a short squeeze of epic proportion.  If you felt this way then the only way in my opinion would be to buy call spreads or call butterflys.  I don’t have the conviction to do that at the moment, but……….

Trade to consider if you were long and looking for protection into what could be a very volatile qtr and conference call:

GMCR ($68.00) Buy Low Cost Collar against Long Stock-BUY NOV11th Weekly 62.50 // 75 Collar for ~.50

-Sell Nov11 weekly 75 call at ~2.60

-Buy Nov11 weekly 62.50 Put for ~3.10

Break-Even On Nov11 weekly Expiration:

Profits btwn 68.50 and 75 make up to 6.50, 75 or higher stock is called away and you make 6.50.

Losses btwn 68.50 and 62.50 lose up to 6.00 but protected below 62.50 (losses of stock btwn spot and the 62.50 put strike you are long plus the premium paid).

Trade Rationale: you would do this if you were long the stock and didn’t want to sell maybe for tax considerations, but possibly worried about extreme downside following earnings.  This structure provides protection down about 8%.

CHECK BACK LATER FOR ANY OTHER THOUGHTS ON OTHER TRADES IN THE NAME.

I also want to make the point that I have no strong directional opinion in the name and do not have any positions in the name…..But i have gotten a bunch of questions today so I thought I would put something out there……