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Posted on 11 November 2011 | 4,315 views

Momentum Stock Green Mountain Coffee Roasters Crashes

Green Mountain Coffee Roasters (Stock Symbol: GMCR) just showed how momentum works both ways in the stock market. Its shares are the latest to crash down from a nosebleed trading multiple, after the company grew less than analysts expected.

The coffee roaster is down $75.09 per share from its 52 week high of $115.98 set just on September 20, 2011 — a mere 7 weeks ago.

Green Mountain joins former investor darlings Netflix (Stock Symbol: NFLX) and OpenTable (Stock Symbol: OPEN). Each traded well over 50 times estimated earnings this summer and has since lost over half its market capitalization. Fast growth can help paper over valuation or accounting worries, but in time they usually catch up.

The Nifty Fifty moniker of the 1960s didn’t refer to the trading multiples of the companies that made the list. But they followed a similar trajectory. These high-growth companies were supposedly stable and worth buying even when their valuations approached 100 times earnings. The subsequent bear market ravaged them. Technology and tastes changed, as they’re wont to do. Buyers of Xerox, Polaroid and Schlitz Brewing shares at high multiples came to regret the decision.

So-called momentum stocks will attract attention in every age. And small, growing firms sometimes turn into giants. Moreover, markets have a habit of creating their own reality for a time. If investors chase the stocks, these shares will outperform, which then reels in still more new buyers. Fundamental analysis can burn skeptics who try to fight such trends. Get the timing wrong on a short sale, and lofty valuations may shoot even higher.

Such stocks don’t often land softly, however. Green Mountain shares were trading at more than 65 times estimated earnings in September. A thorough presentation by hedge fund manager David Einhorn in October helped persuade more investors of the company’s flaws. Concerns over its valuation, patent protection, accounting and mergers had been repeatedly flagged by other short sellers. When Green Mountain’s growth disappointed on Wednesday, the groundwork had been laid for momentum to reverse.

It won’t put an end to the quest for high-performance stocks. Chipotle Mexican Grill, (Stock Symbol: CMG) Salesforce.com, (Stock Symbol: CRM) and Lululemon Athletica (Stock Symbol: LLL) all still trade at close to 50 times estimated earnings or higher. Amazon (Stock Symbol: AMZN) is valued at more than 100 times. Whether it’s coffee, burritos, yoga gear or software, what goes up almost always comes down.

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