"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
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Sun Tzu

Thursday, May 3, 2012

Green Mountain Coffee: Useless Analysts

So GMCR missed earnings yesterday and the stock tanked 40%. A surprise? Not really. GMCR displayed a combination of factors, which has been identified as bearish by academic research (Drake, Rees, Swanson, 2010): "we find abnormal returns (1.11 percent per month) from a zero-investment strategy that 1) shorts firms with highly favorable analyst recommendations but high short interest and 2) buys firms with highly unfavorable analyst recommendations (sell signal) but low short interest (buy signal).".

In the case of Green Mountain, 9 out of 12 analysts had a buy rating on the stock (according to Yahoo Finance). Only one rated the coffee company a "sell". Short interest on the other hand was extremely high: 23% of stock was held short according to finviz.com.

I'm amazed how much analysts are often behind the curve and frankly, I do not understand why.