Manager: Alejandro Paschalides

Model: Energy

Alejandro Paschalides manages Covestor's Energy model, which invests in companies heavily exposed to energy/transportation costs, and uses a top-down approach to qualitatively narrow down investment options. He recently shorted Green Mountain Coffee Roasters (NASDAQ: GMCR), so we asked Alejandro to share his investment thesis for the transaction with us. His response:

GMCR is a classic example of a good company, bad stock. The stock is trading at a very high multiple, so the question is whether or not their future growth will justify the current valuation. The frothy valuation is a result of the recently announced Starbucks deal and good earnings numbers (though some, notably Herb Greenberg on CNBC, in the video below) have questioned the validity of the earnings. The company issued strong guidance, which also helped it to rise recently. I entered into the short position after the recent post-earnings rise, because I don't see them hitting their guidance going forward.

GMCR is a consumer discretionary stock, and these stocks always get hit hardest when there is a downturn in the economy, especially if they are high growth momentum names. I believe you will see a weak stock market in the second half of this year because of the knock-on effects of the Fed's cessation of QE2. Also, high oil prices will force some consumers to cut back on their spending. I don't like to short energy names in such an environment because most are still trading very cheap relative to my long-term projections, so I would like to weather this short-term correction by shorting consumer discretionary names instead. GMCR is a great example of this.

Sources:

"CNBC's Herb on the Street: Green Mountain Brewing Questions" CNBC.com, 5/5. http://media.cnbc.com/i/CNBC/components/Syndicated%20Video%20Player/videomodule.swf?id=3000020386&pcode=cnbcplayershare&play=&base=http://plus.cnbc.com/stickers/partners/cnbcplayershare/