An Investor Creates a Tempest in a Coffee Cup

Since October 2006, Green Mountain’s shares have increased more than thirtyfold. Put another way, $1,000 invested in Green Mountain five years ago is today worth about $30,000, according to data provided by Thomson Reuters. After Monday’s swoon, its shares’ five-year performance now ranks second, just slightly behind Questcor Pharmaceuticals.

Still, Green Mountain has a market value of $12.6 billion, making it worth more than large food conglomerates like Sara Lee and ConAgra. It has made Robert Stiller, the founder of Green Mountain, a billionaire and the richest man in Vermont. It has been one of the best-performing stocks for a number of large hedge funds, including JAT Capital and SAC Capital Advisors.

But it has also brought out the short-sellers. As Green Mountain shares have risen ever higher, a group of skeptical investors have bet against Green Mountain. Many of the short-sellers absorbed large losses as the stock continued to spike in value.

Mr. Einhorn, who became famous after making big and vocal bets against Lehman Brothers before that firm’s collapse, took the podium at an investor conference in Manhattan and denounced Green Mountain as an overhyped and overvalued stock. Within minutes, the company’s shares began to sink. Green Mountain stock dropped more than 13 percent during Mr. Einhorn’s talk before closing at $82.50, down 10.4 percent on the day.

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By Peter Lattman

The New York Times

October 17, 2011

Green Mountain’s headquarters in Waterbury, Vt. 

The company employs almost 5,000.

When shares of Green Mountain Coffee Roasters began trading on Monday morning, they held the distinction of being the best-performing stock on a major exchange over the last five years.

Better than Apple. Better than Google. Better than Starbucks.

Then David Einhorn began speaking.

Mr. Einhorn, who became famous after making big and vocal bets against Lehman Brothers before that firm’s collapse, took the podium at an investor conference in Manhattan and denounced Green Mountain as an overhyped and overvalued stock. He unveiled a 110-page slide presentation called “GAAP-uccino” — a wonky pun referencing generally accepted accounting principles — that detailed his negative view.

Within minutes, the company’s shares began to sink. Green Mountain stock dropped more than 13 percent during Mr. Einhorn’s talk before closing at $82.50, down 10.4 percent on the day.

A spokeswoman for Green Mountain declined to comment, citing the Vermont company’s so-called quiet period before its earnings release later this month.

Since October 2006, Green Mountain’s shares have increased more than thirtyfold. Put another way, $1,000 invested in Green Mountain five years ago is today worth about $30,000, according to data provided by Thomson Reuters. After Monday’s swoon, its shares’ five-year performance now ranks second, just slightly behind Questcor Pharmaceuticals.

Green Mountain Coffee’s stock has outperformed top 

technology companies and the overall market 

over the last 10 years.

Still, Green Mountain has a market value of $12.6 billion, making it worth more than large food conglomerates like Sara Lee and ConAgra. It has made Robert Stiller, the founder of Green Mountain, a billionaire and the richest man in Vermont. It has been one of the best-performing stocks for a number of large hedge funds, including JAT Capital and SAC Capital Advisors.

But it has also brought out the short-sellers. As Green Mountain shares have risen ever higher, a group of skeptical investors have bet against Green Mountain. Many of the short-sellers absorbed large losses as the stock continued to spike in value.

Mr. Einhorn, who runs the hedge fund Greenlight Capital, criticized Green Mountain for “poor transparency.” He attacked the company’s financials, accusing it of “shenanigans” in how it accounts for acquisitions. The company had previously disclosed aSecurities and Exchange Commission inquiry into its accounting practices. Mr. Einhorn also decried what he called out-of-control capital spending that he said was growing much faster than the company’s business.

The battleground over Green Mountain stock centers on the “K-Cup.” In 2006, Green Mountain, a company perhaps best known for delivering a decent cup of coffee at the local gas station, acquired Keurig, a business that manufactured single-cup brewing systems. The Keurig machine brews individual cups in less than a minute from coffee packed into single-use, plastic K-Cup pods.

Last year, more than 85 percent of Green Mountain’s $1.36 billion in revenue came from sales of single-use pods and their brewing systems.

The coffee giants Dunkin’ Donuts and Starbucks have recently joined Green Mountain’s Keurig craze. Each has agreed to sell its own branded K-Cups manufactured by Green Mountain. Dunkin’ Donuts has already begun selling its K-Cups in its stores; Starbucks is expected to start later this year.

Mr. Einhorn pooh-poohed the idea that K-Cups have revolutionized the way Americans drink coffee. He noted that drinking single-serve cups is “the expensive way to drink coffee at home.”

“This is a luxury item that is priced outside the range of many households,” he said.

What is more, Mr. Einhorn said, Green Mountain’s patent on K-Cup technology will expire in about a year, which will open the business to competitors.

Several Wall Street analysts who follow the company disagreed with Mr. Einhorn, whose Greenlight fund is down about 5 percent this year.

“There is not a single argument that Einhorn presented today that couldn’t have been made or wasn’t made a year ago when the stock was at $30 per share,” said Mitchell B. Pinheiro, an analyst with Janney Capital Markets, who has followed the company since 1997 and has a $125 price target on Green Mountain shares.

“This is a real trend and you can prefer to stick your head in the sand and ignore it, but Keurig growth remains strong and will continue.”

Regardless of where the company’s shares end up, Green Mountain’s growth over the last decade has been a bright spot in a weak economy.

The company was founded in 1981 by Mr. Stiller, who made his first fortune a decade before by starting E-Z Wider, a maker of cigarette rolling papers. He tried a cup of coffee at a Vermont ski resort and liked it so much that he bought the roastery and began Green Mountain Coffee Roasters.

He based the company in Waterbury, Vt., the same town where Ben & Jerry’s ice cream started. Today, Green Mountain employs nearly 5,000 and pushes a corporate social responsibility platform. The company donates 5 percent of its pretax profits to social and environmental causes.

The stunning price appreciation of Green Mountain’s stock has made Mr. Stiller a billionaire. He appeared this year for the first time on Forbes magazine’s list of the richest Americans. At Monday’s closing price, he and his family own shares worth $1.9 billion. Earlier this year, Mr. Stiller, now a Florida resident, bought a pied-à-terre in Manhattan, purchasing the Upper West Side apartment of Tom Brady, the New England Patriots quarterback, for $17.5 million.

Other longtime senior officers have also become very rich. Frances G. Rathke, the company’s chief financial officer and former C.F.O. at Ben & Jerry’s, cashed out about $32 million worth of Green Mountain shares for which she had paid $500,000.

Yet around Waterbury, which suffered severe damage as a result of Hurricane Irene, there are few signs of conspicuous consumption. Old Subaru wagons crowd the Green Mountain company parking lot, many of them sporting tattered “Obama ’08” and “Howard Dean” bumper stickers.

Chad Fry, the general manager of the Reservoir restaurant and taproom, a favorite haunt of Green Mountain employees, said that his customers did not seem to focus on the stock price.

“Let’s put it this way,” said Mr. Fry, pointing toward a television playing college football highlights. “No one’s asked me to change the channel to CNBC.”