On October 25, 2011 when Green Mountain Coffee Roasters (GMCR) was trading at $63.85, we projected conservative and extreme downside targets of $59.93 and $37.21, respectively. Subsequent price action for the stock brought the price as low as $17.11. After achieving the downside target the stock rose as high as $158.87 by November 2014. The potential gains of acquiring GMCR below either downside target was +165% and +326%.
The problem with this modeling of the past is having the fortitude of buying the stock and watching it fall –66% before the subsequent rise. Can you handle a decline of –50% or more in your investments? If you can’t sleep at night with losses of –50% or more then don’t bother reading any further as what follows is speculation of what would happen if history were to repeat (NOTE: history does not repeat).
Alternate reading on portfolio losses of –50% or more by Charlie Munger.
Below is a chart of Green Mountain Coffee Roasters (GMCR) with Edson Gould’s Speed Resistance Lines (SRL) based on the most recent peak in the stock’s price.
As can be seen above, the price of GMCR has declined below the conservative and mid-range downside targets of $110.08 and $81.40. The acceleration of the current decline seems to indicate that achieving the $52.71 extreme downside target is very likely.
A review of the last SRL done on January 11, 2013 shows that GMCR blasted through the extreme downside target by a wide margin. The fact that GMCR is prone to extreme moves up and down suggests that the extreme downside target is the point at which to start assessing risk and accumulating shares.