By Pete Gallo
The last two decades may be remembered as America's golden age of gourmet coffees, with Starbucks Coffee springing up latte shacks on every available corner. But in a down economy marked by a retail bust, it pays to be a distributor of coffee products rather than a storefront laden with an expensive real-estate lease.
Hedge fund manager Steven Mandel's investment team at Lone Pine Capital is already brewing returns on this next big trend in the java industry—making gourmet coffee at home or the office.
According to filings with the Securities and Exchange Commission, Lone Pine owns a hefty 8.7% stake in Green Mountain Coffee Roasters, making the hedge fund the second-largest shareholder, with 3.8 million shares in the company.
The Waterbury, Vt., company makes and distributes ground coffee, tea, and cocoa and brewing machines. It doesn't operate shops as Starbucks does but instead sells to supermarkets, households, gas stations and independent java joints.
Shares of Green Mountain have risen from $58 in September to a high of $85.68 as of January 13. With 3.8 million shares, Lone Pine's stake has grown in value from $220.4 million to $325.6 million in less than four months.
Filings with the SEC show that Lone Pine added its big portfolio position in the coffee company last year between June and mid-August. The trigger came after the stock dipped from its high of $90 in June, after a three-to-two stock split.
Mandel's investment team deserves special credit for seeing continued upside in the stock, which had already seen a 9,000% return over the last decade, with average annual-sales growth of 42%, thanks largely to strong sales growth.
Based on his pedigree as a Tiger cub from the Julian Robertson school of investing, Mandel is looking to tap growth at a reasonable price, rather than buying the stock based on some measure of pure valuation.
But where will this added upside come from? The simple answer is that Green Mountain is expanding its lock on the wholesale side of the java business. The company is expected to complete its $35-per-share acquisition of wholesaler Diedrich Coffee sometime in early 2010, having edged out rival Peet's Coffee & Tea, which also wanted the prize.
The themes of consolidation and product licensing may have also piqued Lone Pine's interest in Green Mountain, which last year bought out Tully's Coffee and Timothy's Coffees of the World, which were both licensees of Green Mountain's Keurig (K-Cup) single-cup coffee brewers for home and office use. Green Mountain was looking to control distribution for its K-Cup business. The other licensee is Diedrich, now also set to join the Green Mountain fold.
The Diedrich merger deal still has to get final approval from antitrust regulators, but assuming it does, Lone Pine's position in Green Mountain may get a bump. The Street seems to like the deal. In early January, equity analyst Anton Brenner of Roth Capital initiated coverage of Green Mountain with a "buy" and a target of $110 per share, while noting continued open interest on shorting on the stock.
Whatever the outcome, Green Mountain isn't the only stock percolating in Lone Pine's portfolio. The hedge fund is also a big investor in Apple, holding 3.1 million shares of the computer and iPod maker.
If Lone Pine didn't buy or sell any Apple shares over that same period, the hedge fund's portfolio position stood to grow from $511.5 million to $651 million. Mandel's team may want to hold steady to see if Apple can conquer the publishing world with its much-anticipated tablet computer, in the same way it has grown to dominate the music space with the iPod.
Another strong performer in the portfolio has been FLIR Systems, which has jumped from $23 in September to $32 as on January 13. The company is a worldwide leader in the manufacture and sale of thermal imaging and infrared cameras, and has managed strong revenues thanks to government contracts. Lone Pine owns roughly 5.2 million shares, based on SEC filings. The hedge fund's 3.4% stake was worth $166.4 million as of January 13, up from $119.6 million in September, based on the price gain.
Other large investments in the Lone Pine portfolio include Hewlett Packard, Monsanto, JP Morgan Chase, McDonalds and Qualcomm, SEC filings show.