It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair.... -- Charles Dickens, A Tale of Two CitiesTrading in Green Mountain Coffee Roasters ( GMCR) in the after-hours last night was as trippy as a Fellini movie, combining fantasy with baroque price action. While the company's fourth-quarter earnings results and forward guidance were poor , a 10-year agreement for Coca-Cola ( KO) to acquire 16.7 million (new) shares at $74.98 (representing 10% of the outstanding shares and equal to the 50-day trailing volume-weighted average share price of Green Mountain's stock) with an option to acquire up to 16% of Green Mountain over the next 36 months lifted Green Mountain's shares from $80.50 to over $130 (a gain of over 55%) on Thursday evening. According to the release:
Under their 10-year agreement, the companies will collaborate on the development and introduction of Coca-Cola products on Green Mountain's upcoming machine that will serve both carbonated and non-carbonated beverages, including soft drinks, tea and juice.At $120 a share, Coca-Cola has made (on paper) nearly $500 million from its $1.25 billion investment in Green Mountain. That is a heck of a start to its joint venture with Green Mountain. I shorted Green Mountain stock at $128 a share at around 6:00 p.m. EST last night. For the Green Mountain shareholders, it was La Dolce Vita, as the shares climbed by as much as 45%, to over $130 a share from a close in the low-$80s as Coca-Cola announced that it took a 10% interest in Green Mountain for about $75 a share. For the Green Mountain shorts, it was more like La Strada (one of Fellini's earliest films about a con man's slow descent to a solitary death). La Strada was a Fellini movie that, in the later stages of its completion, caused Fellini to begin to suffer from clinical depression! In shorting the shares, I paid no attention to one of my basic short-selling tenets -- namely, never short a stock (it is OK to buy puts, however) in which the short interest exceeds over 5%-7% of the outstanding float or when the short position represents a large multiple to average daily volume. As of Jan. 15, 2014, there were approximately 37.5 million shares short against a float of 128 million shares and compared to daily average volume of only 4 million shares. With short interest at 30% of the float and 9x average daily volume, Green Mountain Coffee Roasters should have been a nonstarter for me to short. Nonetheless, sometimes (but only in rare instances) one has to reject formulae and move out of one's comfort zone. Such was the case with Green Mountain's share price move of almost $50 (or 55%), to $130 last night.
Why the Share Price Advance in After Hours Might Be DerailedI have a number of reasons for my skeptical take and my short position:
- The Coca-Cola agreement masked weak fourth-quarter earnings and forward guidance. (On TheStreet, Herbela Greenberg covered this well.)
- 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.
- 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.
- 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.)
- 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!)
- 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.
- 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.
- 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) use it for sparkling water, as the flavor market and usage has been slow to develop.
- The soda market is in a clear secular decline.
- 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!
- 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?
This column originally appeared on Real Money Pro at 9:31 a.m. EST on Feb. 6.