Swinging for the Fences with GMCR – KO Partnership Fizz – How to increase your ROI with Options?

On Wednesday Feb 5th 2014 evening during the earnings announcement Green Mountain Coffee Roasters (ticker symbol GMCR)  CEO Brian P. Kelly announced the 10 year partnership with Coca-Cola (ticker symbol KO) to produce Coca-Cola carbonated beverage at home using its patented Keurig machine. This Keurig machine has been producing excellent coffee at home (drink it every day morning), freshly brewed every time by using previously sealed K cups that locked-in the flavor. This required right patented technology to seal the ground Arabica coffee beans at the right temperature at the right time. This technology is transferable to cold beverages as well and that is the thesis. How about a cup of Coca-Cola with all the fizz every time you need it right at your home? This is the fizz that will not fizzle out which may be worth Billions. That is why Coca-cola is betting on it. American Icon Coca-Cola, a $166B company buying 10% stake in a $12B company GMCR ($16B after announcement overnight) is a big fat hairy deal.

Now here is my story with that backdrop.

GMCR held a durable moat (competitive advantage) with their patented coffee K-Cup technology until 2012 when the patents expired. The conviction was lost. Guru and Green Light Capital Fund Hedge Manager David Einhorn shorted (means he is bearish on the stock) the stock big time because of purported bad accounting practices. GMCRto faced stiff competition from Starbucks, Dunkin Donuts, Whole Foods and others who were producing K-Cups of their own.  The stock took a drubbing and slumped from $116 in OCT 2011 to about $58 in OCT of 2013. Thanks to Guru Fund Manager Einhorn for providing a means to avoid my own confirmatory bias by killing the company GMCR which I was able to counter with hard cold emotion-free facts.

I have been stockpiling GMCR stock ever since August 15th 2013 in several batches until November 2013 in my Individual Retirement Account (IRA) while it was sliding down. My own research from reading the annual reports (10Ks) and listening to earnings calls and looking at the big numbers such as return on equity and earnings per share growth rate, revenue growth rate, etc. convinced me that the value of the stock could be as high as $150. Applying a margin of safety of 2, $75 looked like a safe sale price which is half the value. So I kept accumulating the GMCR stock around this price as it fell in to the abyss, up to 40% of my portfolio. The keywords here are “Price” and “Value.” It was extremely hard to do when everybody is selling, but this is what value investing is all about that would produce the highest rate of return. This is Graham-Buffet value investing technique. Ben Graham was a Professor at Columbia Business School and Billionaire Warren Buffet was his student. Gurus Prem Watsa, Mohnish Pabrai, Seth Klarman and Joel Greenblatt are also subscribers to this time-tested technique. Their wealth stands testimony to that technique.

Well, so far that is only theory, but did it produce the highest returns in real time?

To increase the rate of return even higher, Gurus and hedge fund managers teach how to use Options (Calls and Puts and combinations of them). This along with dividends and stock buy backs rake in cash flow every month that reduce the basis (the cost of the stock) of the stocks to even almost to zero at times, at which point the stock is owned free and clear completely paid off. Now there is no market risk, no inflation risk and we are playing with the house money and that will make you rich if nothing else does.

Here is how the options are used on the stocks you already own to increase the ROI.

Now the Climax Happy ending (answer to the question):

I reduced my basis to as much as I could on the 40% of my portfolio investment on the GMCR stock and waited like a vulture for the “Dead Cat Bounce (Wall Street lingo)”. On the Nov 20, 2013 earning call I profited form an Iron Condor Options trade (look for my next post) which produced great ROI (return on investment). This time, I waited for the fat pitch (short pitch in cricket). On Feb 5th, 2014 after the earnings and Coca-Cola 10 year partnership announcement,  it was a big swing and a big hit. The stock rose as high as 62.5% in one hour after the trading was resumed after the halt in the after hours trading. The selling price minus the basis price gave a whopping 46% return in just 5 months which is 110% (translation: investment doubled in 8 months) annualized on that one trade stock holding (GMCR). My portfolio return including other investment activities produced 19% return in 5 months which is 45% annualized (means the portfolio is doubled in 1.6 years).

We have to bust our tails and bend over backwards in the corporate world to get a minuscule pay raise of say 5% a year, if at all we get it. Here you can give yourself a raise of 45% on a decent 6 figure portfolio just only working on the weekends! Go Figure!

I am almost done for the year with still 7 months to go. This is happening when the major indices are trading as much as -5.5% down this year. Comparing this to my 401K return from the financial institution which was a paltry 5% and the Standard and Poors (S&P 500) return of 23% in 2013, I am with the Gurus beating the street and the mutual fund managers (don’t let the mutual fund managers rip you off). May be I am lucky this one time! But read the following quotes:

When you have left it to chance
Then all of a sudden
You don’t have any
More luck.
Pat Riley – LA Lakers Basketball Coach

“I’ve found that luck is quite predictable. If you want more luck, take more
chances, Be more active, Show up more often.
Brian Tracy – Author, Motivational Speaker

The reason why I am sharing this with you is not to brag (even though everybody wants to do that) notwithstanding hind-sight bias (Monday morning quarter-backing) and self-attribution bias, but  to drive home the more serious point that anybody can do this, particularly now that retirement is fast approaching for many, a high ROI in your retirement account would not hurt. And that is an understatement.

For Now,
I am holding an ice cold Coke on one hand and a hot Italian Dark Roast Green Mountain steaming Coffee on the other for more Caffeine as if I needed it! More than what I got from the trade?

Options increase your ROI.