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Kass: Felliniesque Action in Green Mountain

Why the Share Price Advance in After Hours Might Be Derailed

I have a number of reasons for my skeptical take and my short position:

  1. The Coca-Cola agreement masked weak fourth-quarter earnings and forward guidance. (On TheStreet, Herbela Greenberg covered this well.)
  2. 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.
  3. 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.
  4. 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.)
  5. 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!)
  6. 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.
  7. 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.
  8. 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 - Get Report) use it for sparkling water, as the flavor market and usage has been slow to develop.
  9. The soda market is in a clear secular decline.
  10. 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!
  11. 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.

This column originally appeared on Real Money Pro at 9:31 a.m. EST on Feb. 6.
At the time of publication, Kass and/or his funds were short GMCR, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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