Analysis: With Green Mountain, one analyst had it right
NEW YORK (Reuters) - Long before David Einhorn raised red flags about Green Mountain, a little-known analyst from a St. Louis-based brokerage firm had already flashed warnings.
The shares of Green Mountain Coffee Roasters Inc lost nearly half of their value last week after the company cut its outlook and badly missed sales estimates on Thursday. The company, which makes Keurig coffee brewers and single-serve coffee cups, closed at $25.87 after trading as high as $115.98 in September.
The crash was a vindication of sorts for just one of the 12 sell-side analysts who cover the stock: Stifel Nicolaus' Mark Astrachan. As recently as 30 days ago, five analysts rated the stock a strong "buy," four rated the stock a "buy" and two had "hold" ratings.
Astrachan, 34, a director at his firm who covers personal products and beverages, had the lone sell rating among analysts tracked by Thomson Reuters.
Astrachan's view on the company was ultimately justified, but following his bet against the bullish crowd would have cost an investor - big time.
He first issued his "sell" rating for the company in early 2009, when the stock was below $10. Someone with $1,000 invested in the company who sold at that time gave up potential gains of more than $10,000 if he or she had sold at the peak.
Astrachan said he had many conversations with clients - mainly brokerage customers - as the stock continued to push higher and his call looked more and more wrong.
"It was never a call on (Green Mountain's) valuation. It was a call on a fundamental thesis," he said. "People still respected the view because it was thought through, regardless of whether it was right or wrong."
RETHINKING THE CALL
Not long after his "sell" call was published, Astrachan watched as shares of Green Mountain steadily rose higher.
He joined Stifel Nicolaus as part of Stifel's acquisition of the Legg Mason Capital Markets Group in 2005 and had worked in equity research since 2000. Besides Green Mountain, Astrachan tracks Monster Beverage Corp, Colgate-Palmolive Co, Estee Lauder Companies Inc and Procter & Gamble Co, according to Thomson Reuters.
But Astrachan began thinking about Green Mountain more than any company he covered. He kept trying to decipher what everyone else saw in the stock and wondered if he was missing something.
"There were definitely times when it was hard to stick to the 'sell' rating," said Astrachan, an honors graduate from Colgate University. He also holds an M.B.A. from Columbia University.
But unlike his other "sell" calls, such as a recommendation to sell Estee Lauder in July 2010 after the company guided down, Astrachan's view of Green Mountain was not based on a short-term issue. Instead, he called it a "fundamental thesis" that the company's business plans were flawed.
"The growth largely wasn't sustainable," he said.
He believed more consumers had purchased brewers than the company thought - meaning less market opportunity than projected. And he noted that machine owners were using them less over time, hurting earnings.
He kept his "sell" rating even as the company reported years of strong results, with quarterly sales growing over 100 percent at times. His access to the company began to wane.
"We had less and less dialogue through the years," he said.
Astrachan almost changed his rating last July after the company beat estimates and its shares jumped. He placed his rating under review. But a presentation by famed hedge fund manager David Einhorn in October explaining his decision to short the stock renewed Astrachan's conviction. Unlike Einhorn, though, he has not alleged fraud at Green Mountain.
No other analysts who covered the company issued a "sell" rating following Einhorn's warning.
Astrachan said Green Mountain's price plunge "didn't really hit me one way or the other." He declined to comment on the bullish stance of other analysts covering the company.
Janney Capital Markets analyst Mitch Pinheiro, who has had a "buy" rating on Green Mountain since 2006 when it was trading below $3, said his call still has merit.
Pinheiro, who personally owns Green Mountain stock, is sticking to his rating and estimates the fair value of the stock is $100, the highest of any analyst tracked by Thomson Reuters. The stock closed at more than 8 percent higher at $26.38 on Tuesday.
"The growth is slowing, yes. But it is slowing from 70 percent to 50 percent to 35 percent, which is still off-the-chart kind of growth in the packaged food industry," he said.
He said Green Mountain is the fastest-growing coffee brewer in the United States. He believes "they are going to maintain their dominance." What's more, Pinheiro thinks Green Mountain could have strategic value for a possible acquirer.
The 10 other sell-side analysts who cover the company were either unavailable or did not respond to requests for comment.
BEHIND THE CURVE
For some observers, Green Mountain is just another example of over-exuberance among analysts. Critics say the broad reticence to take public positions against any company's shares is evidence of a lingering problem on Wall Street.
Back in 2003, in the wake of the dot-com crash, then-New York State Attorney General Elliot Spitzer helped reach a $1.4 billion settlement with Wall Street's biggest brokerages, which agreed to a settlement with regulators over conflicts of interest surrounding analyst reports.
The issue then centered on analysts who were publicly hyping stocks that some were also privately acknowledging were bad investments.
The settlement was aimed at ending overly favorable research reports and imposing safeguards such as separating funding of research departments from banking and prohibiting analysts from participating in pitches to banking clients.
The settlement has had mixed results, with fewer outright buys, but still a paucity of sells as analysts - whose compensation has declined - are still under subtle pressure to tread cautiously with known clients.
" don't have to tell you that their research is tied to banking, but you know it instinctively. If you're sitting in their seat, no one wants to be cut off from access," said Joshua Brown, a New York City-based financial advisor at Fusion Analytics who runs the blog The Reformed Broker.
Brown said analysts often issue positive to neutral recommendations in order to not stand out from the crowd.
Of the 23,367 analyst recommendations tracked by Thomson Reuters, 5,377 - or 23 percent - are "strong buys." Another 28.5 percent of analyst calls are "buys." And 43.4 percent are "holds" - meaning an analyst expects the firm to perform as well as the market or at the same pace as its competitors. Only 4.2 percent of recommendations are "sell" and just 212 recommendations, or 0.9 percent, of analyst calls are "strong sells."
"These are smart guys. It doesn't mean that their calls are useful. It's just marketing," Brown added.