I'm going to do something that any self-respecting value investor should never do.
I'm forecasting GMCR has likely reached its top. To put it into numbers, I estimate roughly there's a 70% chance of it not going up more than 5% from the current price in the next three years (will not pass $140.50).
UPDATE 8/28: I think I may have been too confident here, and that 60% is more appropriate. Feel free to judge me on the first number though.
The reason being that we've reached the point where there are now so many large short- and long-term risks for the stock that a couple of them are likely to manifest.
Image credit: Brad Wenner
The way I derived this number is not by a mathematical model but by combining various possibilities and an opinion on roughly how likely they are. Please see page 118 of The Warren Buffett Portfolio for further explanation.
The table below summarises the risks, many of them which I've mentioned in my previous two articles.
| Risks | Implications |
|---|---|
| Fundamental | |
| Long-term risks: - High EBIT / EV of 24.4 | . - Multiple could revert to number suitable for medium-growth company - Historically, high valuations have led to reduced stock growth |
| - Inventory fraud - Inflated K-cup sales numbers - Other accounting issues | - Investigation by Einhorn or SEC could shine further light - Harder to inflate earnings - Past overstatements may catch-up |
| - Suppliers can negotiate more favourable contracts with GMCR - TreeHouse / Mother Parkers may capture a piece of the Keurig 2.0 market | - Reduced sales - Compressed sales margins as returns forced towards cost of capital |
| - Saturated K-cup market | - Reduced growth |
| Short-term risks: Keurig 2.0 could disappoint due to: - DRM K-cup restriction - not enough feature improvements - extra costs of launch | . - Reduced K-cup sales - Higher costs |
| Keurig Cold could disappoint due to: - smaller-than-expected addressable market - waiting period before launch (Sep 2015) - competition by Sparkling Drink Systems, set to launch this October a pod that can be used directly on a standard water bottle & in a kitchen-top device (admittedly, with small partnersapart from ICEE& possible in pipeline, & questionable marketing) | - Lower-than-expected Keurig Cold sales |
| Catalysts | |
| - Einhorn could present on GMCR at next Robin Hood Conference - Otherwise, he may present at another venue | - Incorporation of information by market - Possible herding panic |
| - Complacement, overoptimistic sentiment could mean-revert - Return of negative media coverage | - More realistic sentiment - Analysts could reduce their forecasts |
| Lower short interest means: - Less chance of short squeeze - Room for a return of past short-sellers | - Selling of borrowed shares could assist in stock drop |
| Macro | |
| Long-term risk: - High stock market valuation could mean-revert | . Headwind for stock |
| Short-term risk: - Less Fed QE means reduced liquidity | . Headwind for stock |
Below are some scenarios I've though of in which the stock could go up further:
| Scenario |
|---|
| Coca-Cola acquires GMCR, buying it at a premium |
| Keurig 2.0 and/or Keurig Cold do surprisingly well |
| International rollout does surprisingly well (able to take share from entrenched competitors) |
| Bullish environment causes "growth" stocks to go up further without regard of valuation |
| Financial issues are ignored by investors or management succeeds in diverting their attention |
| I'm wrong about the fraud allegations, growth limits or K-cup competition |
| A short stock spike in the next few months because of something temporary |
I've now made two probabilistic statements:
- Chance of Einhorn presenting GMCR as his Best Idea at the next Robin Hood Conference is 65%
- Chance of GMCR not passing $140.50 in the next three years is 70%
I've tried to set out clear criteria for you to judge them in the future. If both predictions fail, I think it is reasonable to say that my stock forecasts likely suck. I admit I wouldn't be the first person giving confident forecasts with little accuracy.
I appreciate feedback, including reasoned criticism. :-)
Full disclosure:
I added a paragraph on the way I derived my estimate on Aug 27, "Mother Parkers" to the table on Aug 29 and the Sparkling Drinks Systems part on Sep 2 , replaced 'optimistic' with 'confident' on Sep 8.
As mentioned before, I own out-of-the-money puts on GMCR, which may bias my analysis somewhat.
