September 2010

I haven’t looked at the fundamentals on this stock, but it looks as if it’s about that time. I’ll crunch the numbers over the W/E.

About the Lawsuit

Green Mountain and certain of its Officers are charged with making a series of materially false and misleading statements related to the Company’s business and operations in violation of the Securities Exchange Act of 1934. The Complaint alleges that Green Mountain artificially inflated the Company’s stock price during the Class Period by issuing inaccurate and unreliable financial statements, which were not prepared in accordance with GAAP and SEC rules. The Complaint further alleges that on August 28, 2010, Green Mountain completed a sale of 8,566,649 shares of its common stock to Luigi Lavazza, for an aggregate purchase price of $250 million, despite the fact that the Company knew its reported financial statements were untrue and that it lacked adequate systems of internal operational and financial controls.

From earlier posts I made here: and for all the analysis: here

There was a comment from Dean that touched on an interesting area of analysis. Working Capital.

Is the company a selling machine as flippe-floppe asserts, or is it rather, simply a fad common stock, that has caught the imagination of the market currently?

The financial statements, from a Working Capital analysis, suggest a fad stock, and potentially a fad gadget. The company, over a five year period has had a woeful record in actually getting paid. Their collections ratio has been 0.82. As a bare minimum, a company should show about 0.96. The last ratio was 0.95. Now this is a tremendous one off improvement, and would in isolation, be construed as a positive.

Receivables have however accelerated past Revenues, suggesting that the company is exercising a lax credit policy to customers, and if, past collections fall back to historical levels, a real problem will become apparent.

Second, Inventory levels have accelerated even faster than Receivables. We have an inventory glut. When inventory builds to excessive levels [increased supply] unless demand is growing faster, which it isn’t, then prices have to drop to sell-off the excess inventory, very often resulting in losses and reduced margins.

As a very significant portion of Revenue is based on selling common stock, and not actually selling product, losses on inventory will have a very leveraged effect on Net Income, as, Investors sour on the common stock.

Is this the future?

I’ve been in Court for the last few days sitting on a jury. Yesterday, Counsel for the defense initiated their open, and called an expert witness: he was an image analyst. His CV, which he read out in Court was very impressive, and I was looking forward to an interesting and technical discussion: to this point the Crown and Police evidence had been a shambles of inepeptitude.

Essentially we were told the following: [i] there are 3 tests performed in an image analysis [ii] the methodology is specific in each test [iii] a conclusion is reached that rates from 1-6: 1 = no correlation, 6 = high correlation

The images were of an aggravated robbery of a petrol station by two armed robbers, and the analysis was designed to ascertain whether the defendent was in point of fact one of the robbers pictured.

Test 1 is the measurement of anatomical landmarks of the face: it is a quantitative test. Test 2 is an analyst’s visual subjective analysis of facial features. Test 3 is manipulation of the images: the images taken from the robbery, plus control images taken from the defendent. The two images are mixed and matched via technology and computers.

Due to hats and bandana’s worn by the robbers, only partial facial features were visible, thus, Test 1 and Test 3 could not be performed. This left only Test 2 the subjective assessment.

The Crown Prosecutor had a chance to cross examine after the presentation of the defense evidence. Did the Crown ever drop the ball. The problem was that the Crown had no idea of statistical investigation and probabilities.

The defense evidence resulted in a conclusion of 1 on the 1-6 scale, based on the following 4 significant differences. [i] the sideburns were different [ii] the robber had some undefined mark/depression on his right cheek [iii] the bridge of the nose appeared farther forward [iv] differences in the shape of various points of the ear.

This analysis could have been attacked immediately on the following basis: what is your confidence level in your conclusion? Now anyone who is vaguely versed in statistics knows that this is a basic, basic question.

The confidence level is calculated from your margin of error, or Z-score, your population or sample size, the distribution, which will provide you with your confidence level expressed as a +/-

The ideal outcome being a high confidence level at least 95%+ and a small margin of error, which you generate from your sample size and selected Z-score.

When you want to estimate a probability, a quick and dirty formula for the required sample size you need to get within the margin of error you need is n = 1/[MOE]*

The problem that the Crown sensed, but couldn’t quite get to, was the sample size of 1. Obviously a sample size this small is going to, particularly in light of the utter subjectiveness of the only Test applied, is going to provide a very low confidence level, and thus a very low probability of the conclusions drawn being statistically significant, and thus the testimony of the expert being taken with a large pinch-of-salt. Certainly his conclusion of 1 on his scale I feel was untenable.

Nonetheless, an interesting couple of days to observe the State in action. If I was concerned before, I have to say that now I am absolutely terrified. The level of ignorance, incompetence and total arrogance has to be witnessed first hand to appreciate just how bad things really are.

Held my nose, and bought.

Close the trade. Nothing much eventuated from yesterdays events.

And so here we go again.

Well that’s essentially what I was waiting for, the panic and volatility in AAPL. Ok, they shook me out a couple of times, but today more than made up for it, a little extra size when you see the exact set-up you’ve been waiting for certainly helps.

And by the time you read this, I’m already out @ $286+ having caught almost the exact low.

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