Thursday, February 2, 2012

GMCR: Hot coffee

Green Mountain Coffee Roasters Inc. (GMCR), which roasts Arabica beans and packages in them in ways that are easy to brew for use in offices and other institutional settings. But also in the home.

It was once the wonder child of bull plays, rising from $5.19 in mid-November 2008 to a high of $115.98 in late September 2011.

Then came the fall, down to a low of $34.06 in mid-November 2011, followed by a mild recovery.

And then came Wednesday's earnings surprise -- GMCR beat the Street estimate by a stunning 64% -- and the stock took a victory lap by gapping up by around 20%.

Whenever an event of that magnitude happens on a chart, perspective is everything.

The rise does put GMCR in an uptrend, setting a higher high following a higher low within the frame of a bounce back from the decline from the absolute peak.

But the price remains well below that peak, and it remains a retracement of a decline -- a correction of a correction -- rather than a resumption of the uptrend that made GMCR so popular among traders.

To resume the major uptrend, GMCR would have to break above $115.98, and that level is a long ways away.

Given the decline, analysts peg GMCR as a sell. However, they have as yet to respond to the earnings surprise. So that might well change. It's all a question of the details tucked within the quarterly financial statement.

Despite the decline, GMCR remains within growth-stock territory, with a return on equity of 20% and a debt/equity ratio of 0.24. The institutional investors are still playing, with 73% ownership of the stock, and the price is high -- it takes $4.09 to control $1 in sales.

With average volume of 5.2 million shares, GMCR is liquid and has a full selection of options with four-figure open interest and very narrow bid/ask spreads.

Implied volatility, although it plummeted with the price gap, is still quite high, at 62%. (Compare that with the S&P500's 18% volatility.) If I opened a position, I would want it to be for a net credit, so I'm selling volatility high when I open and buying it low when I close.

Next earnings are three months away -- not a factor in the decision.

My problem with GMCR is the gap. At 20%, a lot of people will be looking to take some profits. And I suspect that there is still some money in the stock from last autumn that is looking for a good excuse to cut losses and get out. That could limit any further price rise.

In a case like this, I want to wait and see. A bounce down from the $70 level would make a decent iron condor with a $40 floor. Iron condors profit from sideways moves. A break above $72.27 -- the next level of upside resistance -- would turn it into an attractive directional bull play.

Decision for my account: I'm passing on GMCR for now. I'll revisit it next week, looking for a continuation of the price rise or a bounce down from $70.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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