Covestor model: Technical Swing
Green Mountain Coffee Roasters (Nasdaq: GMCR) had been on my watch list for a potential short trade for the last few weeks. The stock has had a great run in 2011, but the price action and underlying supply/demand picture in GMCR was raising some concerns: the stock saw multiple distribution days in the last months. (On a distribution day, a stock declines heavily on above average volume.)
In addition, price momentum faded and GMCR started to trade sideways. Both signs suggested that institutions were selling. Even more concerning to me were two underlying charactistics: the stock accumulated a relatively high amount of short interest while the average analyst rating was still a buy. This combination, many short sellers and bullish analysts, has been identified as an extremely bearish combination by academic research: it seems like short sellers, who are often very sophisticated investors, are simply faster in identifying weakening companies than the analysts.
GMCR chart, via Google Finance
Since Tuesday, October 18, we know the identity of one of the short sellers: David Einhorn, the hedge fund manager, who got famous with his early short calls on St. Joe's and Lehmann Brothers.
I shorted Green Mountain Monday morning, before Einhorn gave his presentation at the Value Investors Conference. Of course, I did not know that Einhorn would present his thesis a couple of hours later when I opened ?the position. I simply saw how GMCR was trading the last weeks and I thought that there must be a big seller in the market. Unlike Einhorn, I never conducted a fundamental analysis of the stock. I believe that fundamental weakness can often be identified upfront by looking at how a stock trades.
The markets are a discounting mechanism and If I would be a famous hedge fund manager, I would probably do the same: first short a stock and then start talking about bad the company ac! tually i s. It might be slightly immoral, but a) it's legal and b) it's business.
I covered a portion of my GMCR short today (10/20).
Disclosure: Short GMCR
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