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Three new quick pitches: a Precise Long, a Healthy Long, & a Short Mountain

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August 29, 2010 – Comments (2) | RELATED TICKERS: VPG , AHS , GMCR

There's nothing like taking a week's vacation to rejuvenate oneself.  I'm just returning from one and I cranked out ten new picks and two new pitches for existing picks today.

I plan to highlight most, if not all of them over the next several days here in my blog.  Here's the first three...two longs and one short.

Short Green Mountain Coffee Roasters (GMCR)

 

"Investors who shorted Green Mountain for any extended period of time have been absolutely crushed as the stock soared more than 1,000%, that's right a thousand percent, over the past four years.

It's not that I hate GMCR or think that it's a poorly run company, heck I use a Keurig at the office and it's not bad, it's that I am searching for overvalued companies to provide a hedge to my mostly long CAPS portfolio and this Company seems to fit the bill.  I just don't think that Green Mountain will experience the rapid profit growth that Mr. Market currently seems to be pricing in.

One major headwind that Green Mountain faces is a huge increase in the price of coffee beans, which according to Barron's account for nearly a quarter of the Company's cost of goods sold. Coffee bean prices recently hit a twelve-year high:

Price no buzz kill for java lovers

http://www.freep.com/article/20100828/BUSINESS07/8280315/Price-no-buzz-kill-for-java-lovers

Add to this the fact that the company's inventory levels are rising rapidly. As someone who has a background in the auto industry, I know that rising inventory levels are often a sign of bad things to come. Again according to Barron's Green Mountain's day's supply of product has risen to 84, from 74 from the same period a year ago.

Furthermore, while the company's revenue growth is astounding at 64% year-over-year in its most recent quarter, its growth rate is slowing. 64% is down from 77% in Q4 and 68% earlier in 2010. In this sort of economic environment, it's easy to see consumers being hesitant to pony up a premium price for the convenience of Green Mountain's coffee products, when the good old coffee pot will do the trick at a fraction of the price.

Even if higher input costs and a slowing economy don't take their toll on GMCR, the fact that the patent protection on its "K Cups" is scheduled to expire in 2012 might.

At 44 times its estimated 2010 profits, I have a feeling that GMCR has further to fall in today's weak market."

Long Vishay Precision Group (VPG)

 

"VPG is a small spin-off of Vishay Intertechnology (VSH). Small spin-offs often create attractive buying opportunities for investors because large funds sell their shares after they have received them, putting downward pressure on the stock that is unrelated to its operational performance.

As a supplier to the electronics industry VPG's business is a little more economically sensitive than I would like, but with a market cap of under $200 million and $60 million worth of cash on the books the Company is cheap. It shouldn't have to dip into its cash horde to fund its operations either. Vishay Precision remained cash flow positive even at the height of the Great Recession. It trades at around five times its estimated 2010 EBITDA and around only two times its peak EBITDA. 

Another plus is that the company's operating margin has fallen to only 7%, versus a peak of 16% several years ago. I love to purchase stock in companies that have terrible profit margins. Any improvement in their operations that leads to more attractive margins can immediately improve their profits without any improvement in revenue. Purchasing inefficient companies and waiting for them to become more efficient is is a great strategy for a slow economy like the one that we are experiencing today.

I would have liked to have added VPG to my CAPS portfolio about 20% ago when it first hit the market, but I still believe that any combination of an improvement in margins as a result of the spin-off or improved operations or an improvement in the economy could easily cause VPG's stock to rise by 50% to 100% from this level."

Long AMN Healthcare Services (AHS)

 

"The healthcare staffing company AMN Healthcare's (AHS) stock has been absolutely wrecked lately. The company's shares were already under pressure and starting to look attractive when it announced that it was acquiring MedFinders. Mr. Market really hated that move. AHS is down another 40% since then. 

That is what got me interested in the company. It's almost as if AHS is being priced as though it will go bankrupt. I don't believe that will happen. The company should be able to cover its interest payments barring an absolute implosion in the economy and the demand for nurses. With an aging population, the demographic tailwinds are certainly in the company's favor." 

So there you have it.  I'd love to hear others' thoughts on these three trades. 

Deej 

2 Comments – Post Your Own

#1) On August 29, 2010 at 10:20 PM, paperpump (96.35) wrote:

great job deej- the green mountain coffee roasters pitch is interesting, however i must let you know I've been providing them with some significant earnings tailwinds every morning after i grab the paper. Come 2012 they will be a more compelling caps underperform due to the erosion in their pricing power. I like the spinoff idea- I will do some further research. 

P2 

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#2) On August 30, 2010 at 11:23 PM, Mstinterestinman (23.19) wrote:

I think Green Mountain will be a much better short in 2012 if they dont get a new patent for Keurig within the next year however I see an easy double.

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