After the close on Tuesday Green Mountain Coffee Roasters reported better than expected fourth quarter earnings that sent the stock up 27% yesterday. One trader decided to play the rise in the stock with options, and bought 24,000 Dec. 33 calls for $3.85 with the stock at 35.89. This is a bullish bet that the stock will appreciate by at least 2.7% over the next 22 days.
This bullishness comes after GMCR reported EPS of $0.64 versus expectations of $0.48, net sales increased 33% year over year, and next year’s guidance was raised. GMCR has been beaten down by the market and is currently 68% off its all-time high from 2011. The stock’s downfall began in 2011 when David Einhorn made a strong bearish case for the stock at an investment conference. His thesis for shorting the stock was the K-Cups are more expensive than buying traditional coffee grounds and wouldn’t catch on with consumers making the company’s growth unsustainable and the stock overvalued. Then in April of this year Starbuck announced it would be entering the single serve coffe market as a competitor to GMCR, which sent shares tumbling further.
However, this earnings report suggests that the increased competition is not hurting GMCR as much as anticipated and that consumers are accepting the idea of K-Cups, along with their price. Years ago critics of Starbucks said the company’s business model would fail because its coffee was overpriced, but today few complain of Starbuck’s prices because consumers have adjusted to Starbuck’s prices. GMCR is a similar story and the fact that Starbucks is entering the field goes to show how mainstream the single-serve coffee industry is.
The pop in the stock yesterday was primarily driven by short covering. Short interest has been building in the stock since this summer and peaked at 33% at the beginning of November. This stock is likely to see some analyst upgrades after this blow-out quarter, which could drive more short covering in the near term and send prices higher. I don’t necessarily want to own the stock here, now that it is already over 25% off its lows, but would be willing to take a chance that the stock continues to appreciate off of its newly found momentum with some calls.
This bullishness comes after GMCR reported EPS of $0.64 versus expectations of $0.48, net sales increased 33% year over year, and next year’s guidance was raised. GMCR has been beaten down by the market and is currently 68% off its all-time high from 2011. The stock’s downfall began in 2011 when David Einhorn made a strong bearish case for the stock at an investment conference. His thesis for shorting the stock was the K-Cups are more expensive than buying traditional coffee grounds and wouldn’t catch on with consumers making the company’s growth unsustainable and the stock overvalued. Then in April of this year Starbuck announced it would be entering the single serve coffe market as a competitor to GMCR, which sent shares tumbling further.
However, this earnings report suggests that the increased competition is not hurting GMCR as much as anticipated and that consumers are accepting the idea of K-Cups, along with their price. Years ago critics of Starbucks said the company’s business model would fail because its coffee was overpriced, but today few complain of Starbuck’s prices because consumers have adjusted to Starbuck’s prices. GMCR is a similar story and the fact that Starbucks is entering the field goes to show how mainstream the single-serve coffee industry is.
The pop in the stock yesterday was primarily driven by short covering. Short interest has been building in the stock since this summer and peaked at 33% at the beginning of November. This stock is likely to see some analyst upgrades after this blow-out quarter, which could drive more short covering in the near term and send prices higher. I don’t necessarily want to own the stock here, now that it is already over 25% off its lows, but would be willing to take a chance that the stock continues to appreciate off of its newly found momentum with some calls.
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