Investing Between Greed and Fear Over Coffee and Donuts

NEW YORK ( TheStreet) -- A good friend of mine, an industry veteran, has historically described market ups and downs as the "oscillation between greed and fear", as it applies to investor psychology.

Despite the fact that I've given him a lot of ribbing about that term over the years, there is a lot to be said for what it conveys. In a nutshell, when the markets are continually heading higher, investors can become greedy, leading them to pay too much for securities. When fear sets in, and markets fall, investors tend to sell to a level in which securities prices are punished far beyond what they deserve. You can certainly apply that logic to individual stocks, as well.

Green Mountain Coffee Roasters ( GMCR) is a great example of the "greed" factor. While Keurig machines and K-cups became quite a phenomenon over the past few years, investors got a bit too greedy with the stock, pushing it from about $9 in January 2009, to more than $100 by August 2011. While the company's growth was explosive, the stock price got ahead of itself, and the multiples became ridiculous.

Concerns over accounting issues, and slowing growth helped to send shares from around $108 in August 2011, to $44 by the following November. By last July, shares had fallen to $18, before rebounding to $40 recently. Investors who bought in because of the single-cup coffee craze, but ignored valuations got hurt. I've never been a big fan of the single-cup phenomenon, primarily due to the expense; in fact I still think it's a fad. Admittedly, those who took positions in Green Mountain early in the summer have doubled their money; taking advantage of the fear that had set in. It remains to be seen how this story will end.

Krispy Kreme Doughnuts ( KKD) provides an interesting example of fear. The former cult stock had languished for years following mismanagement, over-expansion, and accounting issues. In recent years, the company has quietly put its financial house in order, rebounded, and is growing again, primarily through international franchising. But for years, investors avoided it, and with good reason.

At one time, Krispy Kreme was a bit like Green Mountain. It was a cult stock following its 2000 IPO; and expectations for growth were huge. Things did not work out well, and most gave up on the name, as shares fell from the $50 range in 2003 to about $5 in 2005. Investors did not want to be burned again. Shares now trade near a 6-year high.

Something very interesting happened on May 8; shares fell 9% on 6 times average volume on no news, and it actually has a connection to Green Mountain. As it turns out, Green Mountain founder Robert Stiller, who owned 11% of Krispy Kreme, sold his stake in the company, dumping a large amount of Krispy Kreme shares on the market at one time. This sale was reportedly the result of margin calls he received after the huge hit his Green Mountain shares endured just days earlier, following a bad earnings report. Kripsy Kreme shareholders, who kept their cool, and saw this event for what it was, have been well-rewarded since; shares are up about 72% since early May.

Part of value investing is buying names that others have given up on, and avoiding those that everyone else is clamoring for, especially when valuations get out of hand. It's not for everyone; it often means owning names that are unfamiliar or unpopular. It certainly was not cool to own Krispy Kreme even a few years ago; while everyone and their brother wanted a piece of Green Mountain.

When "greed" goes too far, investors get hurt. When "fear" does the same, there may be opportunity.

At the time of publication the author is long Krispy Kreme.

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

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.