This coffee stock is too darn hot

Times are good for Green Mountain Coffee, but its valuation should give investors pause.

By Jamie Dlugosch Mar 18, 2010 2:41PM

The story is the same. Hot stock grows quickly, attracts momentum investors, and ultimately crashes spectacularly.

 

The market is full of rocket stocks that have come crashing to earth. The list includes Krispy Kreme (KKD), Crocs (CROX), and Sirius XM Radio (SIRI) to name just a few.

 

Who will be next on the list? (10 stocks not on the list)

 

My bet is on Green Mountain Coffee Roasters (GMCR). The upstart coffee company that sells the Keurig brand coffee maker in addition to varieties of coffees and teas has seen its stock rocket higher over the last 2 years.

 

Shares have appreciated by more than 500% in that period.

 

While the early excitement may have been justified by explosive sales and profit growth I think it is safe to say the stock has gone too far too fast.

 

The justification for such a statement can be found in the valuation of GMCR shares. The company trades for 7 times book value, 4.5 times sales and 75 times trailing earnings.

 

Talk about a nose bleed valuation. Such a lofty market capitalization is quite similar to other rocket stocks that eventually fell back to earth.

 

It is not a matter of if the same fate will befall Green Mountain it is a matter of when.

 

No doubt the company is on an incredible run. I too recently purchased a Keurig and find the product quite attractive and fun to use, but I’ve purchased fad products before. The market can only go so far.

 

I still buy Crocs for my children, but sales growth at that company hit a wall that combined with oversupply crippled the stock.

 

For Green Mountain look for competitors to eventually become more aggressive on its own turf. When this much money is at stake others take notice.

 

At the moment Green Mountain is free and clear to grow aggressively, but that does not mean investors should be willing to pay any price for the stock.

 

Let’s get a little bit real here. It rarely makes sense to pay lofty prices for fad stories. There is simply little room for air and nowhere to go, but down.

 

I would be a seller of this stock immediately before the music stops.

 

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