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Green Mountain Coffee Needs Some Decaf

NEW YORK (TheStreet) -- Given the recent popularity of Green Mountain Coffee Roasters GMCR, whose stock has soared 30% in four weeks, critics who remain with shovels in hand waiting to bury this company will have to postpone those plans .... again.

Much to their dismay, Green Mountain, whose business is built upon how well it gives its customers "a kick," is still alive and kicking. But the company still must overcome some self-inflicted wounds. To that end, despite my love for coffee, which, often gives me the jolt I need to crank out articles like these, Green Mountain has not been the easiest company to like. And this has had nothing to do with the company's brew.

First, questions have been raised by the Securities and Exchange Commission regarding the company's business practices, particularly how Green Mountain recognizes its revenue. This came after management had disclosed to the SEC that it had overstated its 2007 income by $4.4 million after tax, which amounted to a cumulative 3 cents per share. Not to mention, the SEC also made inquiries about the company's relationship with a fulfillment vendor.

Fast-forward a couple of years later, the SEC returns. This time authorities announced that it had filed a civil enforcement action against Chad McGinnis, a former Green Mountain employee, alleging insider trading of the company's stock. It's worth noting that the company cooperated fully with the SEC and immediately took action to clear its name from any wrongdoing.

Last but not least, I believe the Street is being a bit presumptuous believing Green Mountain is now out of harm's way following the expiration of it K-Cup patent. It's true that it has been over one year since the expiration, but rivals have also now captured 8% of the single-serve market share, which is already 3% higher than the 5% market share Green Mountain management predicted it would relinquish. Not to mention, this has come at a much quicker pace than the company predicted.

In that regard, I believe the company's growth expectations, which prompted analysts at Williams Capital Group to raise their price targets to $106, remain too aggressive. And I'm puzzled at how quickly analysts have dismissed companies like Kraft (KRFT) and Nestle (NSRGY) that have both the infrastructure and resources to not only enter this market, but turn it on its head.

What's more, although the company has recently extended its relationship with coffee giants Starbucks (SBUX) and Dunkin Brands (DNKN) to produce K-Cup packs, it seems narrow-minded to assume that at some point neither Starbucks or Dunkin won't develop their own single-serve ambitions, which is one of the pitfalls of an expiring patent.

The fact remains, although Green Mountain deserves credit for having pioneered the single-serve coffee brewing market, the company -- for better or worse -- still operates in a Starbucks world. Plus, with quick-service restaurants like McDonald's (MCD) having expanded their coffee offerings, I remain cautious at the risks that still lies ahead from increased competition.

Having said all that, I do realize that Green Mountain's popularity has yet to affected by these factors, which have long been proclaimed. But that was also the case for Kodak, which survived for several years after the arrival of the digit camera -- until it couldn't. Blockbuster video lived more than a decade after Netflix (NFLX) -- until it couldn't.

My point is, Green Mountain may escape death for several more years. But there's a reason why its critics, including David Einhorn, who has a sizable short position on the company, have never put down their shovels. And the fact that the stock is up close to 80% year to date despite the company's history of poor internal controls is remarkable.

All told, I don't see how this stock, which has already posted incredible gains, still makes sense right here, given the unfavorable risk/reward tradeoff.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Stock quotes in this article: GMCR, KRFT, NSRGY, SBUX, DNKN, MCD, NFLX 

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