When we make projections about the future success of a company, we
rely heavily on data from their past. It is important to be aware if
that data changes. Green Mountain Coffee Roasters (GMCR) announced in
September that they had found a 7.6 million dollar error which meant
their income in the past had been overstated. They also indicated
that they were investigating further.
This information prompted a $10 drop (almost 30%) in their stock
price. The "herd" of institutional investors collectively reacted to
the fact that past history might no longer be valid to use to make
judgments about the success of the business.

The information was released by GMCR as a press release. It also
necessitated an 8-K filing with the SEC. An 8-K report must be filed
every time a company announces an unscheduled material event that
might be of significance to shareholders. You can be sure the
institutional shareholders watch for these and read them. If you own
a stock, and you want to avoid that "what happened?" feeling when you
notice your share price has dropped 30%, you might get in the habit of
keeping an eye on these. Especially if you own a stock with a P/E of
71 like GMCR had on the date of the 8-K release. In todays world,
you can often sign up at the investor relations section of company
websites and receive automatic emails when they come out. This gives
you just as much opportunity to react to adverse news as the
institutional guys. The reaction of institutional investors to a
revelation of accounting errors is sell first and ask questions later.

This past Friday, GMCR announced they had found additional errors and
will be restating financial reports from the past 3 years. They hope
to have this done by the beginning of December. They disclosed a
list of mistakes that primarily appear to have meant their past
earnings were overstated. These restatements will mean that
historical data about sales, net margins and earnings that you have
been using to make future predictions will be changing. If you are
not getting information directly from company financial reports, it
is important to make sure that the source of the data you are using is
updated to reflect these changes. It is also important to reevaluate
any judgments you have made about the future of this company in light
of the updated information.

I do not follow GMCR closely enough to evaluate whether the extent of
the misstatements will ultimately make it a good or bad investment. I
do know that I wouldn't want to own this stock at current prices
without a good understanding of what is being reported and what it
might mean to their future results. If I didn't really understand the
accounting information that was being provided, I think I might want
to watch from the sidelines for a while until the experts figured it
out. If this company is truly growing as well as it appeared, there
will probably be more opportunities to purchase its stock in the
future.

--
Laurie Frederiksen
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