A key signal I look for as a starting point with stocks is insider buying — but not just any old buying.
That’s exactly what we see at Keurig Green Mountain Inc. , the controversial company whose single-serve K-cup is in the process of changing how the world drinks coffee.
The insider signal: Two directors bought a lot of stock at $133 to $138 a share in December, and two aspects of the purchases make them particularly bullish, by my system. It’s important to keep this in mind as the company reports quarterly earnings after the stock market closes Feb. 4.
First, consider the sheer size. The insiders plunked down some serious coin — nearly $2 million.
Next, Keurig insiders have a habit of buying ahead of big moves in the stock. Three Keurig insiders were big buyers in November 2013 at $64-$69, as I told subscribers of my stock letter, Brush Up on Stocks, at the time. Since then, the stock has doubled, compared with a 12% gain for the broader market.
But now, Keurig Green Mountain insiders are buying more.
A solid insider signal is just the starting point, of course. From there, you have to drill down for qualities like financial strength, the presence of some advantage like a moat, and solid management. I give Keurig a check for all of those.
It’s important with insider buying to see catalysts on the horizon. Here are four potential catalysts for Keurig.
1. Keurig could surprise everyone and beat estimates when it publishes earnings. Keurig’s stock fell sharply last November when it guided down for the quarter that it’s about to report. Keurig set the bar lower, but holiday sales of its 2.0 coffee machine released in September may have gone better than expected. The insiders buying in December may have been trying to get out in front of this news. Even if that’s not the case and earnings for last quarter don’t shine, at least three other factors should drive this stock a lot higher over the next few years.
2. Keurig coffee machines will conquer many more households. There are around 121 million households in the U.S., and Keurig has a machine in about 20 million, or 16%, of them. Companies like Netflix have shown that it takes a while for new consumer products to break through from early adapters into the mainstream, but once they do, growth continues at a robust pace. That’ll be the next phase for Keurig, analysts say.
Matthew Grainger at Morgan Stanley thinks Keurig coffee makers will be in 25% of households by 2020, contributing to 10% annual sales growth over the next several years. That’s one reason he has a one-year price target of $160 on the stock. Travis Sell, an analyst who follows the stock for Thrivent Financial, thinks it will be more like 30 million households in five years.
Why will Keurig coffee machines continue to be popular? They’re simple, convenient and less wasteful. And Keurig’s new 2.0 version addresses a shortcoming of the older machine: It lets consumers make a carafe of up to four cups of java instead of one cup. Keurig has also been busy expanding its partner base, which includes coffee and tea flavors from popular brands like Dunkin’ Donuts , Starbucks , Krispy Kreme , Peet’s Coffee & Tea, Folgers, Lipton and Twinings. More are on the way. Keurig also partners to make house-brand coffee pods with big retailers like BJ’s Wholesale Club, Harris Teeter, Target and Costco Wholesale . In short, it’s got a lot of bases covered.
3. Keurig is about to change how we get our cold drinks. Come this fall, the company will release Keurig Cold, the cold-drink version of its single-serve coffee machine. Naysayers like to cite the limited success of the SodaStream cold-beverage machine to raise doubts. But with their big stock purchases, insiders are signaling to investors that’s the wrong way to look at it. Here’s what they might be getting at.
Keurig has over 400 engineers, with experience on projects like the Space Shuttle and the stealth bomber, and they’ve designed a superior cold machine after five years of development, says one hedge fund analyst.
A few key examples: They’ve figured out a better way to put fizz in drinks without messy cartridges. The machine can also add the right doses of bubbles required to make various popular brands of soft drinks to standard. Such a level of precision and consistency opened the way for exacting partners like Coca-Cola and Dr Pepper Snapple to sign up. More are on the way, no doubt. Keurig’s machine can also turn out cold beverages. SodaStream offers none of this.
Keurig insiders are also betting that consumers will go for the convenience of having dozens of drink types available, without taking up much pantry space.
“With Coke and Dr Pepper Snapple signed with exclusivity to Keurig well before launch, we believe the soda industry has clearly tabbed Keurig Cold the superior at-home carbonation delivery technology,” says Canaccord Genuity analyst Scott Van Winkle, who has a $168 price target on the stock.
Of course, there’s no guarantee the Keurig Cold machine will be a hit. But besides the insider buying, other hints suggest that will be the case. Surveys conducted by Goldman Sachs and Morgan Stanley found that 50% of consumers and 58% of Keurig coffee-machine owners say they’re interested in buying the Keurig Cold machine.
KeyBanc Capital Markets analyst Akshay Jagdale cites the “one-way exclusive” nature of the brand agreements as evidence of industry enthusiasm. That means Keurig can sign up other brand partners, but Coke and Dr Pepper are exclusive to Keurig Cold. “This tells us that Keurig has significant leverage in these negotiations,” says Jagdale, who has a $175 price target on the stock.
4. Keurig has a big potential abroad. Keurig partner Coca-Cola is as much a distribution company as it is a brand and soft-drink giant, with its huge network and clout in so many countries. Coca-Cola has inked a 10-year agreement to partner with Keurig on its cold-drink platform, and Coke bought a big slug of Keurig stock, as part of the arrangement. Keurig CEO Brian Kelley was a senior executive at Coke from 2007 through late 2012. All of this points to the likelihood that Coke will use its vast distribution network to help sell Keurig products abroad, says Thrivent’s Sell. He also thinks Starbucks might partner to distribute Keurig products in China.
Managers are always bullish on their companies’ prospects, so you have to take what they say with a grain of salt. Wall Street analysts? Same thing. But in my experience, when the bullish stories are backed by the right kind of insider buying, they’re a lot easier to believe. That’s what we have at Keurig Green Mountain.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush is a Manhattan-based financial writer who publishes the stock newsletter Brush Up on Stocks. Brush has covered business for The New York Times and The Economist group, and he attended Columbia Business School in the Knight-Bagehot program.
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