Where Today's Max Pain Is
While the stock market ramp on the disappointing ECB press conference can be, somewhat, explained and was to be expected by the central bank-addicted market's renewed focus that since the ECB did nothing, it is now the BOJ's turn to ramp up Quantitative Easing - a thesis which has been floating since November, and at one point resulted in 700 pips of "priced in" USDJPY upside - one group of investors is having a bad day: all those short Green Mountain Coffee shares, which as we pointed out last night exploded to 52 week highs in the aftermath of the Coke minority investment announcement. This is today's maximum pain trade.
This trade has been further exacerbated by the fact that as the chart of Short Interest below shows, the higher the stock price went into yesterday's (disappointing) earnings announcement, the more shorts piled in (if not reaching the highs seen in late 2012) , encouraged by repeated utterances of the short thesis by the likes of David Einhorn and, of course, perpetual piggybacker Whitney Tilson, and as of the most recent report amounted to 37.6 million shares, or a whopping 31% of the stock float.
Incidentally, and since we still operate under a brokne, centrally-planned market, this was partially to be expected: as we explained last September in "Presenting The Best Trading Strategy Over The Past Year: Why Buying The Most Hated Names Continues To Generate "Alpha"" sadly the only sure way to generate returns under Chief Risk Officer Bernanke and now Yellen, has been to go long the most shorted names and wait for the "come to Goldman" moment.
All that said, those short and still refusing to cover may have some reasons for hope. Here is some perspective from Doug Kass who shorted the stock after yesterday's pop:
I have a number of reasons for my skeptical take and my short position:
- The Coca-Cola agreement masked weak fourth-quarter earnings and forward guidance. (On TheStreet, Herbela Greenberg covered this well.)
- It could be argued that in light of the fourth-quarter results and absent the Coca-Cola deal, Green Mountain's share price would be under $70 a share on yesterday's release -- perhaps even lower.
- The coffee story has likely played out for Green Mountain. If the current fundamental trends continue, Green Mountain Coffee Roasters' sales could shortly turn negative.
- A 10% holding in Green Mountain, though too much to ignore, might be too little to matter. (Note: The Green Mountain deal was only $1.25 billion compared to Coca-Cola's $165 billion market capitalization.)
- The value proposition of at-home soda (costing about $0.50 a serving) vs. the purchase of a 12-pack for $2.75 at the supermarket is suspect. (At least coffee is brewed, soda is simply poured out of a bottle. In fact, you don't even need a glass!)
- The business opportunity is small and might be viewed as an affront to Coca-Cola bottlers who are trying to accelerate bottle and can sales.
- The business opportunity involves a lot of execution risk. In particular, the technology for the cold beverages that Coca-Cola and Green Mountain are contemplating (i.e., a carbonation tablet) hasn't even been developed -- there is not even a prototype yet.
- It is uncertain that the home soda market is all that large and whether it is taking market share. The heaviest users of SodaStream (SODA) use it for sparkling water, as the flavor market and usage has been slow to develop.
- The soda market is in a clear secular decline.
- Coca-Cola might have taken the stake in Green Mountain in order to enter the coffee market -- it might want the coffee not the cold!
- Coca-Cola paid 168% of SodaStream's market cap for 10% of Green Mountain. Does this make sense in light of SodaStream's large (7 million) installed base while
Green Mountain currently has no installed base and still appears to be one and a half years away from its product launch?
Similar to Italian director and scriptwriter Frederico Fellini's films, Thursday evening's outsized share price advance was a combination of investors' and traders' desires, fantasies and dreams.
To me, Green Mountain's sharp share price rise was like one of Fellini's LSD-driven experiences in which objects (and their functions) have lost their significance and deviated from reality.
So is this time different? We will find out, however, we fear by the time the true intrinsic value of GMCR emerges, there will be no shorts to pick up the pieces.
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