Two High-Growth Stocks Available at Low Valuations

By Ashish Sharma - June 20, 2012 | Tickers: GMCR, GRPN | 0 Comments

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Both Groupon (NASDAQ: GRPN) and Green Mountain Coffee Roasters (NASDAQ: GMCR) enjoy significant consumer preferences and continue to grow at high rates. Yet they are available at valuations that are significantly lower than what such high-growth companies should enjoy.  

A lot of it has more to do with negative press and investor fears than the actual fundamentals of these companies. I believe the current negative sentiment presents an attractive opportunity to grab these stocks at a significant discount to their fundamental values. Here’s a closer look at these companies.

*Consensus expectation data as taken from Yahoo Finance

Groupon has undergone a lot of bashing ever since news of its IPO became public. First there were a series of article on Techcrunch that criticized the company’s high commission on the deals and the deep discounts, which adversely affected the small businesses it serves (at least in short term). Then there were others who went on calling Groupon a Ponzi scheme that can never make profits or generate positive free cash flows.

Groupon’s recent results have proved its critics wrong. It reported $39.6 million of operating income and $70.6 million of free cash flow last quarter. It posted impressive 50% plus incremental margins in its business and its top line accelerated 33% despite its lower marketing expense.

I do agree that company was overvalued when it was trading in high 20s. However, after the recent correction the stock has became too attractive to ignore. Its valuation is close to the buy-out offer it received from Google before it became public. A lot of investors are concerned about the negative press the company has received and its accounting restatements. I believe things will change going forward as a few more quarters of consistent results will help the company in regaining investor confidence.

Green Mountain Coffee Roasters is another stock that's seen a lot of negative sentiments. The stock is in a downward trend ever since David Einhorn made his famous bearish presentation on GMCR at the Value Investing Conference in October last year. The presentation cited lofty expectations the market was building in for GMCR and its significant premium versus consumer peers, which was unsustainable. 

True that the stock was obscenely overvalued at that time and the company was trading at a multiple that usually is reserved for high-growth tech companies. However, the stock has now corrected to very attractive levels. Even Einhorn quoted in slide # 99 of his presentation that:

“A more realistic assessment of potential earnings is closer to $3.50 than $9.00 and at that point GMCR should garner a market multiple rather than a premium valuation.”

If we assign a market multiple or a multiple in line with its consumer peers, the stock should be trading at at least double its current price.

One needs to understand that GMCR is a real business and its does have significant brand loyalty among its customers. Its leadership position, customer preference and current low valuation make it an attractive buy candidate in the current environment. The same characteristics also make it a very attractive acquisition target and with just a $3.22 billion market cap, I won’t be surprised if it starts receiving bids from the larger players like Starbucks in the near future.

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