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Green Mountain Coffee Roasters Stock Stabilizes

Shares of Green Mountain Coffee Roasters have plummeted following the disclosure of an SEC inquiry into the company's revenue recognition practices.
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(Green Mountain Coffee Roasters story updated with latest stock price action and analysts' commentary)
NEW YORK (TheStreet) -- Shares of Green Mountain Coffee Roasters (GMCR) ended Wednesday's trading session down 16.1% to $31.06 following the Tuesday disclosure of an SEC inquiry into the company's revenue recognition practices.

In after-hours trading, shortly after the market-close, shares of GMCR were ticking up and down by no more than 1%, in contrast to the massive drop that occurred after-hours on Tuesday on news of the inquiry.

In a 8-K filing on Tuesday, the following was stated: "On September 20, 2010, the staff of the SEC's Division of Enforcement informed the Company that it was conducting an inquiry and made a request for a voluntary production of documents and information. Based on the request, the Company believes the focus of the inquiry concerns certain revenue recognition practices and the Company's relationship with one of its fulfillment vendors. The Company, at the direction of the audit committee of the Company's board of directors, is cooperating fully with the SEC staff's inquiry."

In a client note, Piper Jaffray analyst Anthony Gikas defended the stock, saying that he viewed the near-term weakness as a buying opportunity. Gikas said he thinks GMCR will report "very strong" holiday sales in the coming months and reaffirms his price target of $37 a share. However, he does note that despite the SEC inquiry hurt near-term stock valuation.

In an investor note, Stifel Nicolaus analysts Mark Astrachan, Mark Swartzberg and Edward McPike said they believe the SEC inquiry will mainly look at different revenue recognition changes GMCR carried out over recent years and on its ties with M-Block, which Green Mountain sells Keurig brewers and K-Cups to for re-sale purposes.

The analysts said that M-Block accounted for 35% and 50% of the company's net sales and accounts receivable, respectively, in fiscal 2009 and added that Green Mountain Coffee Roasters has changed revenue recognition policies in recent years relating to sales incentives.

"I think the risk clearly outweighs the reward now, and it doesn't make sense to average down in GMCR amid waves of institutional selling," Ken Shreve, manager of


Market Movers model portfolio said. "When a high-beta, high-multiple stock like GMCR gets hit with an SEC probe, there's no positive way to spin out. It's just flat out bad."

Shreve said he went long GMCR on Aug. 6 at $30.64 and plans on closing the position today. He'll look to sell into any strength for a small profit. "At worse, it'll be a break-even trade." Meanwhile, BGC Financial director and technical analyst Roger Volz said he's starting to monitor what represents short-term risk levels to see how prices behave on at test. "The next ledge of support can be found at $29.40 so we'll this juncture I'm in no hurry to explore a re-entry."

On Tuesday, Volz said the revelation about the SEC inquiry could be the beginning of a fundamental shift for Green Mountain Coffee Roasters -- "breathing life into the bears." Volz said it could be a game changer for the stock depending on how fast the company can get the inquiry settled.

He added that the timing of the disclosure could be better, as it occurs uncomfortably close to quarter-end.

"Now fund managers need to look at portfolio weightings, have to ask themselves whether they want to hold this position with this question arising," Volz said.

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On Tuesday, GMCR volumes on the put side had been light when the news unfolded.

-- Written by Andrea Tse in New York.

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