Investor's (H)Edge Portfolio: A Nasty Week and a Highly Caffeinated Short

Editor’s note: The Investor's (H)Edge Portfolio, managed by David Brown, is a long/short, absolute-return portfolio of 13 Longs and 13 Shorts.  Each week David reviews one long position and one short position and either renews or replaces the stocks, based primarily on the stocks' scores in the Sabrient Outlook Rankings. Learn more more about the Investor's (H)Edge Portfolio.

A Nasty Week and  a Highly Caffeinated Short

by David Brown, Chief Market Strategist, Sabrient Systems

It has been a nasty week. The crisis in Libya and escalating oil prices continue to pummel the market, and today, two other global giants joined in the fray. China announced a significant trade deficit, and Japan revised its 4th quarter GDP downward by 1.3%.  Then U.S. jumped in, announcing a widening trade deficit and initial jobless claims that were worse than last week’s (though still within the expected range). Nothing else out of the ordinary happened, but all this was enough to send the market to its knees. The S&P 500 dropped below its 50-day moving average for the first time since August 31, 2010.  That, we consider a bearish sign.

Moreover, investors’ fears are rising, as measured by the daily VIX and the longer-term VXX.  The VXX, which has been on a steady incline for the past several weeks, reached 33.8 today, while the shorter-term VIX jumped 8% to close at 22.

Caffeine High. Since our publication last Thursday, the S&P 500 has fallen 3%, and unfortunately, our Investor’s (H)Edge Portfolio has taken a hit as well.  But virtually all the decline was caused by just three stocks, the worst of which was one of our short positions, Green Mountain Coffee Roasters (GMCR).

GMCR shot up 41% today, increasing its market cap by more than $3 billion. The rise was triggered by an announcement that Starbucks (SBUX) will sell its coffee in K-cup pods for the GMCR single-serve brewers. Sounds great, right?  Uh, maybe not.

I was flabbergasted at the market’s reaction to the news, as were a host of other analysts, since it appears that the main result of the SBUX-GMCR partnership will be a decrease in GMCR’s profit margins. Obviously, GMCR won’t make as much money on a cup of Starbucks’ coffee as they make on their own brand.  Moreover, GMCR continues to be extremely cash-poor, with a cash-per-share of only $0.23.  Plus, the company is under an informal investigation by the SEC and is involved in many class-action lawsuits that include questionable insider selling transactions.

One can only imagine that today’s announcement caused a terrific short squeeze since nearly 25% of the GMCR’s float is short. It would appear that the buying frenzy was further fueled by aggressive day traders and perhaps unsophisticated investors who look at GMCR’s partnership with Starbucks as exciting.  It was exciting for Starbucks, as the company now has a new sales outlet for its coffee (SBUX gained only about 10% on the news), but I can’t see anything good about that for GMCR. Although it was dismaying to see the stock price skyrocket on one of our short positions, we remain extremely bearish on GMCR.

Portfolio Review

This week we are reviewing long position GME and short position BKS  . . . Click here to learn more about the Investor’s (H)Edge portfolio.


Full disclosure:  The author does not personally hold any of the stocks mentioned in this week’s “Stock Ideas.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

david / Tag: BKS, GMCR, GME, S&P 500, SBUX, VIX, VXX /