What has it taken to get and keep GMCR down to the current level? Well, selling a large number of non-existent shares helped a lot. The last report date for GMCR short interest was 7-13-2012, with 29,596,972 shares short, the highest number in the past year. The next trading day, another 2.4M shares were sold short http://regsho.finra.org/FNSQshvol20120716.txt to drive the price down almost 10% to $17.82.
In order to keep the price down in this neighborhood for the past couple weeks, the shorts have stayed busy. Six of the last ten trading days, there have been 800k or more shares sold short. Last Friday alone, to make sure the $18 and higher calls expired worthless, over 1.1M shares were shorted http://regsho.finra.org/FNSQshvol20120727.txt . The 1.1M shares (over 17% of the day's trading) that were shorted on Friday only held GMCR to a ten cent gain, so the continued shorting is yielding rapidly diminishing returns.
How many GMCR shares are short right now? Almost certainly over 30M shares, perhaps close to 35M. That would be well over a quarter of the float. In other words, of all the unrestricted GMCR shares on the open market, about one in four of them are owned by two investors at the same time. On the other hand, there is a group of shorts out there that cumulatively own a negative 30-35M shares. That's right, they will have to buy back about a quarter of the openly traded shares to close out their positions.
Historically, GMCR has provided their initial guidance for the upcoming FY in their Q3 earnings report. What can we expect them to say about FY13 this week? Will they provide lower guidance due the two patents that expire this fall? Since they just told the SEC that those expirations won't have a material impact, that seems very unlikely. If they hit the midpoint of their FY12 estimate at $2.45, and estimate growth at only 25-30%, the FY13 earnings estimate will come at $3.06 to $3.19, which would exceed the analysts' current average estimate of $3.05. They could easily estimate 30-40% growth. For perspective, even with the lower estimates from the last earnings report, GMCR earnings will grow at over 55% this year over last.
What about the high inventories that shorts enjoy reminding us of? Well, at the start of last quarter, there were zero Starbucks stores selling K-Cups. At the end of last quarter, there were over 10,000. That is a whole lot of stock to lay in, and GMCR was able to move all that inventory onto Starbucks' books. What do you think that did to GMCR inventory? What do you think that did to GMCR sales?
With the current price hovering right around book value, and reports that retail shorts can't find any more shares to sell, GMCR is wound up pretty tight. GMCR shares are priced for a big miss and poor guidance for the rest of the year and FY13. Yet there is no indication they won't have a positive report this week. While some of the shorts are far enough in the money to hold their positions if share price moves against them, the massive shorting the past month has created a large group of weak hands on the short side. If the share price moves against them, expect an unruly crowd jamming the exits.
Before earnings release 450k were available to short. Now after the release, there are 45k. I don't how accurate this things is, but I don't see much short covering yet. Expecting a barrage of negative articles.
More on the Bear case from LST since some on this thread were asking...
One thing I don't get that he doesn't point out. VH accounted for 10% of the k-cup volume increase, so that alone contributes $100M to the revenue increase. The seasonality thing and corresponding speculation around creditor/debtor and insider actions is certainly enlightening and plausible. One additional side note in favor of the revenue increase was the Father's/Mother's day promotions...it was a more popular gift idea with young folks in 2011 vs 2012. It was a new trend that became popular and was marketed well at the time, but it likely subsided some in 2012 because they seem to have been gifted over Christmas 2011 instead. At some point kids come up with a new gift idea, that is if the 'rents haven't dropped the hint already that it's a bit played out.
Nice report, That secondary offering was very overlooked at the time. Smart people saw the writing on the wall a month or so afterward. Q32011 was such an anomaly, that this Q3 will look shabby, because it will be hard to beat.
The problem with GMCR sales data is that it is completely raw. GMCR, unlike any other company we have performed market research analysis on in the past, does not permit inventory and pipeline build to be shared. In other words, firms such as ours, NPD or Blueshift can't juxtapose sales with inventory and come up with an accurate assessment of possible revenues. Therefore, although sales may very well be slowing, we have very little insight into manufacturing and pipeline builds which are important when analyzing sales and costs for the quarter. Any analyst who has projections is simply throwing darts against the wall to see what sticks but that is GMCR's perogative and proof positive as to why analysts have been wrong more often than right.
Last year, at the New York/New Jersey port, our point of contact which usually disseminates GMCR's shipping docs, showed us a letter he received from GMCR stating that Bill of Ladings should no longer be shared with analysts or market research analysts under penalty of litigation. GMCR became a very closed box over the course of the last 9 months and probably for their own self-preservation given the investing public sentiment. I'm hoping they have been able to get inventory levels more in-line and the product mix in-line for the individual retailers, but that remains to be seen.
The only monkey wrench that I see is if the company actually decides to put an end to the patent extension wonderment and outright says that the patents in question will definitively not be extended. Additionally, they could announce another partnership of some kind, but obviously this would be a more positive development. I'm hoping for low 20s myself as my cost average is right around $21. I would not anticipate a squeeze that has traction at this point because of the disparity between the institutional holdings and retail holdings. For a squeeze to take place and hold you have to have a sizeale retail following and the retail investor in GMCR has largely vacated its position in GMCR. A squeeze in the traditional sense therefore is highly unlikely, but a gradual rise in the PPS over time is always possible.
I agree with you Common that the Vue may come down in price as the company did mention on its last CC that pricing would be subject to flexibility. It remains to be seen of course. I also agree that the patent litigation, if won, will dramatically improve the company's position in the market place and the stocks performance. Many investors have curbed their position in GMCR due to this issue and would go _______ to the wall buying shares of GMCR should they win.
Putting into perspective winning these 2 court cases is in the same class as GMCR purchasing ( Detrict coffee). It wasn't a question how much they were purchased for , it was that GMCR gained control of that (License). With that in GMCR hands they became the driver.
It would not surprise me at all to see the VUE be reduced in price point and the Keurig brewer elevated in price. This would help to lock out competition or to license and build the Keurig essentially. GMCR would still receive licensing fees without manufacting cost, very smart actually.
The game changer with GMCR is ( IP) protection. If GMCR wins thiese upcoming cases then it will (set precedent). There is no gray area, control that which you own and license only to those you choose. This IMHO will propell GMCR if they can prove patent infringement.