Continuation from yesterday………..Applying the same principals, an investor in this stock should have been looking for a trend reversal at the end of 2007 to take advantage of Keurig’s potential bear leg. Unfortunately, our bear raid in GMCR in 2007-2009 would have, more or less, failed. Without outlining every trade, we would have ended up trading in and out of the stock twice during this period. Selling our original long position and going short at around $8 a share in the early 2008 and then covering and going long in May of 2008 at $8 a share. Only to go short again in October of 2008 at $8 a share. Covering our position in March of 2009 in order to go long, once again, at $10 a share.
GMCR Trades #3-6: Trading in and out of the stock in 2007-2009. All entry, short and exit points would have occurred at around $8.00 a share (+/- $0.50). Net realized gain from previous entry point in 2003….$6.75 or 540%. Plus, a loss of $2.00 on the short side. Overall profit…..$8.25 or 3,200%. New long entry point at $10 a share in March of 2009.
Even though our bear raid in Keurig’s stock in 2007-2009 would have been a failure, we would have learned something incredibly important. We would have learned that the company’s stock price showed strength in the face of one of the most brutal bear markets in history. And while most other high flying stocks collapsed to the tune of 60-80% during the same period of time, Keurig’s stock remained within a tight trading range. Even rallying close to 100% in the mid 2008 when the rest of the stocks were going down.
Typically, such strength in the face of a falling market means that the stock price will recover at X multiple to market when a bear market ends and the overall market begins to recover. This would be of a particular interest to any analyst following the stock. Further, an analyst familiar with the overall mathematical and timing composition of the stock market would have been aware that the stock market was bottoming in the early 2009. At this point it would have made perfect sense to cover our short position and go long when the technical picture confirmed. That happened in March of 2009 at $10.00 a share.
Subsequently, the stock performed just as its relative strength during a bear market of 2007-2009 had suggested. Surging from $10 to $108 a share by September of 2011. A 1,000% gain in two and a half years. Yet, any investor in Keurig should have been extremely concerned at this point or at least very cautious. The stock, once again, ran away from its fundamental base and was selling at extreme valuation levels.
And while the technical picture was incredibly strong and there were no impending bear markets on the horizon, extra caution at this juncture would have been justified. Once again, that was due to the stock’s extreme fundamental overvaluation levels and its vertical rise over the preceding two years.
To Be Continued Tomorrow……
