Growth Brewing at Green Mountain

05/25/2011 1:30 pm EST

Focus: STOCKS

Timothy Lutts

Publisher, Cabot Heritage Corporation

The distributor of one-shot coffee cups looks set to become the next great beverage blue chip, writes Timothy Lutts, chief investment strategist of Cabot Wealth Advisory.

Even though the market indexes have weakened in recent weeks, the broad market's health still looks good. And there are still a lot of great growth stocks to choose from.

One that might fit very well in your portfolio is Green Mountain Coffee Roasters (GMCR).

Green Mountain is the dominant manufacturer of single-cup coffee brewers, a business with a classic recurring income element. Once you buy (or receive as a gift) the company's Keurig brewer, you must buy K-cups of coffee, over and over again. And no matter where you buy them, Green Mountain gets a piece of the cash flow.

Green Mountain spent years making deals with brewers like Timothy's, Tully's, Caribou, Celestial Seasonings, and Newman's Own. But two months ago, it hit a home run by locking in a deal with Starbucks (SBUX).

And then, early in May, it released an excellent quarterly report—revenues surged 101% to $648 million, while earnings exploded 129% to 48 cents per share. Also, the after-tax profit margin was a record 11%, superb for a "food" provider.

So, the fundamentals are great. But what makes me call the stock "The Next Coca-Cola" is the behavior of the stock.

Since the announcement of the Starbucks deal, the stock has been trading very tightly. That tells me institutional investors are taking control, as they slowly move into the stock.

And that tells me that in the future, this stock will trade more and more like Coca-Cola (KO) did in its best growth decades—it will become a stock that institutions lock up for the long term. (In fact, Wellington and Fidelity together owned 33 million GMCR shares at the end of the first quarter, up from 17 million the quarter before.)

Also, it appears to me that as the forces attempting to reduce the epidemic of obesity in our culture increasingly demonize soft drinks, coffee drinks are likely to become even more popular than they are today.

Now, that doesn't mean that I recommend you hold GMCR for the long term. But it does mean that the current uptrend is one you can take advantage of. With the stock trading near $80, an all-time high, I'd wait for a pullback to get on board...ideally the 50-day moving average, which is now at $68.

If all goes well, it could be the start of a very rewarding relationship, in which Green Mountain comes to dominate a global coffee-brewing business, initiates a dividend, and becomes respected far and wide as a safe long-term holding.

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