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Green Mountain: Doing Well With the New Moat

Keurig® K45 Elite Brewing System

It was in October 2011 that David Einhorn presented a slideshow to the Value Investing Conference. I frankly haven't kept close tabs on the consequences: what has happened to the stock price of Green Mountain (NASDAQ: GMCR).

The two year stock price chart is available here.

GMCR was on its way down, off its September 2011 peak price of $110, before Einhorn said anything. For GMCR, the fall was horrid. The price was below $30 by the start of the new year 2012.

It didn't start recovering for more than a year. In September 2012, its patent on its K-cups expired. This was a critical part of Einhorn's original argument: the intellectual property was the moat keeping competitors away. Those neat little pods let you brew coffee one cup at a time in your kitchen, (or in a hotel suite) and people were willing to pay premium prices for that convenience. After September 2012 had passed and the patent protection was lost: at least that loss had been further discounted into price. The sword of Damocles had fallen.

Stock markets look forward, never back, so after that expiration was a fait accompli, the possibility of a price recovery lay open.  

One fairly obvious means of recovery was to create an improved form of the K-cup, patent the improvements, and of course sell the new machines that can use the new improvements. Accordingly, as early as September 27, GMCR was making announcements like this, "Green Mountain Coffee Roasters Inc. expands its line of Keurig Vue Brewers."

Replacing the old moat with a new one.
By November 8th, it was announcing that it had revolutionized at-home espresso with another new system.
 
That was what the market wanted to hear, and its turn-around began soon thereafter. It still hasn't returned to those late-summer-2011 levels, but it has gotten to $80, but its price did get to $80 before a recent pull-back.

So ... what? Three things:

1) Einhorn was right within the timeframe he had in mind, and I'm sure he made good money onhis well-timed pessimism

2) Longer-term buy-and-hold investors may feel some vindication: their stock didn't go to zero, and their company may have a lot of productivity left in it

3) IP is incredibly important in the business world today, both in the getting and in the losing, and in the tricky business of putting such a moat back in place once you've lost it.
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