Is This Hot Coffee Stock a Buy, Sell, or Hold?

There are few things in life better than a fresh cup of coffee first thing in the morning. Uncovering a small growth wonder in the making typically tops a hot cup of joe, though.

Not all coffee stocks are created equal, however, and if you're looking for a coffee stock, there are quite a few choices out there, from household names like Starbucks (Nasdaq: SBUX) and Dunkin' Brands Group (Nasdaq: DNKN) to battleground fallen angel Green Mountain Coffee Roasters (Nasdaq: GMCR).

One small up-and-coming name in the game is Coffee Holding (Nasdaq: JVA), a micro cap that's been all over the map this year. The company's 52-week range has been $3.67 to $30.98, so its high represents more than eight times the low. It enjoyed a meteoric rise over the summer, but what goes up must come down.

With shares trading in the ballpark of $8, is Coffee Holding a buy, sell, or hold?

Buy:

• Relationship with Green Mountain: Green Mountain is a mean, green growth machine, even if it draws its fair share of criticism. Coffee Holding increasingly relies on Green Mountain for sales of its wholesale coffee. In fiscal 2009 and fiscal 2010, Coffee Holding attributed 35% and 47% of revenue to Green Mountain, respectively, and in the first nine months of its current fiscal year, 54%. By proxy, Coffee Holding's success piggybacks on Green Mountain's growth, and Coffee Holding's revenue last quarter jumped a massive 88% to $35.8 million. As Green Mountain continues to put up solid growth, so should Coffee Holding.
• Insider ownership: Coffee Holding has been a family business for more than 35 years, with two brothers currently at the helm: CEO and CFO Andrew Gordon and Executive Vice President of Operations David Gordon. The two have been with the company for 22 and 24 years, respectively. Andrew Gordon holds over 890,000 shares and David Gordon owns almost 960,000. While each brother unloaded 100,000 shares recently, they still own more than a third of the company between the two of them. All insiders combined own about half of shares. We Fools love high levels of insider ownership as one of the best votes of confidence from those in the know.

Sell:

• Relationship with Green Mountain: Relying on a company that's bursting at the seams with growth cuts both ways. While Coffee Holding is putting up strong growth figures in lockstep with Green Mountain, the K-Cup wonder has its own concerns to address. Hedge fund manager extraordinaire David Einhorn presented some very good bearish points to consider in his 110-slide presentation, aptly titled "GAAP-uccino" (a title so bad it's good). Relying on any company for more than half of sales is a ginormous risk factor, any way you look at it. Even more so when you're talking of an incredibly polarizing company like Green Mountain.
• The rest of the income statement: As soon as you look beneath the soaring top line, everything below is particularly bitter. Despite sales jumping 88%, gross profit shrank by 16%. Gross margin also plummeted from 13% last year to less than 6%. We see a similar story by the time we make it down to the bottom line. Net income fell by 50%, and net margin dropped from an already razor-thin 2% to less than 0.5%.

Hold:

• Valuation: Many small growth companies have troubles with turning soaring revenue into widening profitability as they focus on growing sales. When compared to peers', its top-line growth seems reasonably priced.

Source: Reuters. TTM = trailing 12 months.

Survey says...
As much as I love good coffee and skyrocketing revenue growth, I'm not impressed with Coffee Holding. This stock is a sell, as it has no apparent competitive advantage and monstrous risks. The reliance on Green Mountain is too ominous for me, even though it can be a boon at times. I'm even in disbelief that it pays out a quarterly dividend -- $0.03 last quarter – since it's hard to see that as sustainable with negative cash flow from operations. I'm even going a step further by giving it a big fat red-thumb "underperform" CAPScall.

There are plenty of better coffee stocks out there, namely Starbucks and Peet's, which are safer picks in my Foolish mind. If you're looking for growth and can stomach the ride, Green Mountain is the way to go.

Coffee Holding's dividend looks far from solid, so if that's what you're looking for, the stock is not for you. The good news is that we've uncovered 11 stocks whose dividends are here to stay in a recent 100% free report. Get access to it and "Secure Your Future With 11 Rock-Solid Dividend Stocks."