With 2011 almost in the rearview mirror, many investors start to mull over their portfolios and ask what comes next. It's a fair question, and the answers we find are really the crux of great investing. The ability to identify value before the market has already baked expectations into the stock price is what distinguishes the successful investor.
With that, let's take a look at Coffee Holding Company (Nasdaq: JVA ) . This company is an integrated wholesale coffee roaster. Their manufacturing, roasting, and packaging provide coffee for private label, branded, and in-house brands.
Stats for Coffee Holding
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Year-To-Date Stock Return
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118.01%
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Market Cap
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$51.5 million
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Price/Earnings Ratio
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14.77
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Estimated 5-Year Growth Rate
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16%
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Dividend Yield
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1.48%
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CAPS Rating (out of 5)
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*
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Sources: S&P Capital IQ and Yahoo! Finance.
A look back
2011 was an exciting year for Coffee Holding. The company ran up 733% before falling back to its current year-to-date return of 118%. What gives? One of the largest reasons is that the company is intrinsically linked to former market darling Green Mountain Coffee Roasters (Nasdaq: GMCR ) . Coffee Holding gets as much as 53% of their revenue from the Vermont brewer. As shares of Green Mountain reached stratospheric levels, Coffee Holding rode a java-fueled high up to as much as $30.98 per share on July 11, 2011.
But the stock's meteoric rise was not enough to justify its lofty multiples and it fell through September. The biggest blow came when David Einhorn called Green Mountain's accounting "shenanigans" in his presentation GAAP-uccino. The chart below illustrates the correlated rise and fall of these two stocks. Beyond the pronounced pop and drop during the late summer, you can see a lot of related movement.
Bean counting for 2012
Going forward, Coffee Holding will likely experience a rough ride. A record growing season in Brazil and Vietnam for robusta coffee beans is expected to produce a glut in the supply and push prices lower. This builds on a 9% drop in prices for the beans already this year. By contrast, arabica coffee prices still remain high despite a small pullback recently. With Tanzanian arabica prices on the rise, there is speculation that the bean will continue to be more expensive going forward as output peaks and Columbian supply can't meet demand.
Arabica beans, the higher quality of the two, are used in Coffee Holding's own branded products, as well as their customers' brands. Coffee Holding will have to pass these costs along to customers and risk thinning margins if they don't raise prices enough. Many of the companies which brew with arabica beans, including Dunkin' Brands (Nasdaq: DNKN ) , Starbucks (Nasdaq: SBUX ) , McDonald's (NYSE: MCD ) and Caribou Coffee (Nasdaq: CBOU ) , will likely be negatively affected as well.
By contrast, brewers which utilize a blend of arabica and robusta beans, like Kraft (NYSE: KFT ) and J.M. Smucker, could benefit.
Foolish final thought
Despite the big pullback in share price, I am still skeptical about Coffee Holding's potential going into 2012. Their reliance on Green Mountain Coffee Roasters leaves them vulnerable to the fortunes of one company and one product -- namely, the Keurig brewer. While the large portion of insider ownership by the Gordon brothers is encouraging, both recently sold large stakes. Due to their smaller size and emphasis on arabica beans, the company will remain sensitive to unpredictable coffee price swings. Steer clear of these guys for 2012.
While I'm decidedly dour about Coffee Holding's future, I'm 100% upbeat about The Motley Fool's pick for the top stock for 2012. As an emerging-market enthusiast, I am hugely optimistic about this company's future growth potential. The report is free, but it won't be there forever, so if you'd like to uncover the pick, click here to check it out today. Happy investing in 2012, and Fool on!
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