Thursday, October 20th, 2011
Who cares if Green Coffee Mountain Roasters has engaged in shenanigans?
Green Mountain Coffee Roasters (GMCR) shares had a mini-crash after hedge fund manager David Einhorn questioned the company’s accounting and shipping practices. Should a momentum trader care what Einhorn thinks?
Way back in 2009 I wrote that GMCR was a classic momentum stock and that after a big move it was tough to hold onto, but probably the right thing. Since then the stock (which as been split) has effectively rocketed from just under $20 to over $100.
In the chart below I show how you would have played it with the only profit-taking rule you need. As you can see, each time the stock consolidates, then makes a fresh new high, you move the stop beneath the consolidation.
One a daily chart below, you can see the trailing stop would have been triggered in August, well before Einhorn sent the stock lower.
Should you be concerned about the possibility of GMCR being involved in “accounting shenanigans?” From an ethical point of view, yes. But from a trading point of view no. As a momentum player it’s not really your business. Some of companies I’ve made my biggest profits in have gone on to crash and burn amid scandal.
As a momentum trader we’re interested in only a few things when we buy: the stock has gone up, the stock is still going up, the company is growing strongly.
When we sell we’re only interested in one thing: the stock is no longer going up (based on the ‘only profit-taking rule you need’). It’s that simple.
The momentum player doesn’t care about accounting irregularities; not because they don’t concern him, but because we simply don’t have time to verify for ourselves whether they exist or not.
The reason we have adopted the momentum method is its efficiency: because most of us have other jobs, we don’t have time for detailed analysis; we can look at a chart and earnings and revenue, and then work out whether the stock is going up and whether earnings and sales are accelerating.
Einhorn may or may not be right (and I have my suspicions!). But it doesn’t matter. The momentum system would have got you in (see the 2009 post why it would have); and the profit-taking rule would have got you out.
This attitude may sound risky, and it is. But at least we’re compensated for taking on and accepting that risk!
This entry was posted on Thursday, October 20th, 2011 at 2:41 am and is filed under Stock picks. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
