Selling Short: Green Mountain Coffee Roasters
(9 pages of text)
Green Mountain Coffee Roasters is considered a short sale candidate (a stock sold short makes money if the stock price declines). The business is growing quickly, but there are signs of potential problems. The case provides a realistic illustration of bullish versus bearish investors. Like in a mystery novel, there are spies, possible misrepresentation, and conflicting information here. Decision-making under uncertainty is explored — a factor professional investors must deal with every day.
Case discussion topics include risks in short selling, margin loan calculation, investor behaviour, stock valuation analysis, forecasting business growth potential, forecasting earnings reports, management incentives, actions taken by management to increase the stock price, aggressive accounting practices, assessing the business impact of a patent expiration, and the impact of a business growth rate on stock market valuation.
Green Mountain Coffee Roasters is an excellent case for use after teaching at least one case on analyzing a public company as a potential investment. The case takes the analysis process to great depths and brings up the possibility of making a “bet” that a stock price will decline.
Students are forced to see that things are not always as they appear at first glance:
Management may act for its own benefit, not for the benefit of shareholders.
- Accounting may not represent the actual condition of the business; earnings may be manipulated.
- Different investors have different expectations. The case shows an attempt to determine which forecast is correct.
The case illustrates an in-depth, business forecast/modeling methodology for Green Mountain’s business. The requirement to make a decision with incomplete information — something professional investors must deal with every day — is brought to students who are usually expected to find a “correct answer.”
The case also presents an opportunity to discuss several advanced investment topics, which are covered in the teaching note:
Long/short hedge fund investment strategy
- Portfolio risk assessment/modeling
- Margin calculations
Finance and Insurance
United States, Small, 2011
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