1 Reason This Coffee Stocked Surged 75% in 5 Days

Coffee stocks are going on a java-fueled bender, with Coffee Holding Co. (NYSE: JVA  ) surging 75% in just five trading days; Dunkin' Brands (Nasdaq: DNKN  ) up an impressive 28% year to date; and Starbucks (Nasdaq: SBUX  ) pushing new all-time highs. Apparently not all ships were lifted by the tide, however, as shares of Green Mountain Coffee Roasters (Nasdaq: GMCR  ) face-planted 20% in five days.

Green Mountain's crash can be explained by the threatening entrance of Starbucks new single-serve brewer, the Verismo, as well as lingering concerns about their patent expiration. Starbucks seems to be firing on all cylinders, and continues to push internationally. Dunkin' Brands continues their meteoric rise to valuations that rival high P/E poster boy Amazon, with the coffee company trading at a P/E of 111. But what about this crazy 75% pop by Coffee Holding Co?

What's brewing
Coffee Holding Co. surged after releasing impressive results for their fiscal first quarter. The company recorded a 120% increase in sales, which translated to earnings per share of $0.24. These results stand out against their $0.19 EPS from the same quarter last year. 

According to the company's release, "The increase in net sales primarily reflects higher sales prices compared to the first quarter of fiscal 2011, and an increase in sales of green coffee."

The good
The rise in sales of green coffee shouldn't be that surprising. These days, everyone wants to toss their hat into the brewing ring. Even McDonald's (NYSE: MCD  ) , not historically known for their coffee, has made huge strides in the space with their McCafe line. This division continues to be a key driver of their same-store sales growth.

As more companies look to brew premium coffee, Coffee Holding Co. should be one of the biggest winners. The wholesale roaster sells both private-label and branded coffee, which should help them satisfy consumers as they sway between one and the other.

Furthermore the company noted "an increase in private-label and branded sales." This is great news, since they have historically been heavily reliant on the sinking ship that is Green Mountain Coffee Roasters, and an increase in private-label sales will help them diversify from that.

The bad
One reason Coffee Holdings Co. was able to record higher sales is that coffee prices remained at historical highs in the quarter, although since January they have been trending steadily downward. This is a bit of a double-edged sword, since they now must make up the sales in volume -- but this should be easier with lower prices.

Unfortunately, this remains a ridiculously volatile stock. In the last 52 weeks the company has traded as high as $30.98 and as low as $4.25. Their current price of $13.65 seems to split the difference, but is tough to justify with a sky-high P/E of 65. Unfortunately the five-year growth estimates of 16% per annum don't seem to justify the risk.

The ugly truth
It's always hard to see a stock run up 75% and feel like you "missed it," but ask any investor that held on through the August pop and drop if the brief euphoria was worth the gut-wrenching drop that came. My guess is that it wasn't.

Stocks like this will swing wildly, taking investors emotions along for the ride, and that's no way to invest for the long term. The Motley Fool continues to demonstrate again and again that meaningful wealth is created by a quality buy-and-hold strategy. The The Motley Fool's Top Stock for 2012 is a great example. It's an emerging-market retailer that has taken a page of operational excellence out of Costco's book and has a tremendous runway to take off on. You can uncover the stock today in our free report by clicking here.

Austin Smith owns shares of McDonald's. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of McDonald's, Green Mountain Coffee Roasters, and Starbucks. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters and writing covered calls on Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 15, 2012, at 6:42 PM, spwangsu wrote:

    The authur is so laughable. I am wondering how many RIMM stocks he owns since last year because RIMM has extremely low PE.

    JVA's forecast PE is about 10. It is the cheapest stock among the coffee makers. Look at how AAPL run in the last month, JVA has just started.

  • Report this Comment On March 15, 2012, at 9:21 PM, TMFBWItime wrote:

    @spwangsu

    Perhaps you missed the part I said about the growth rate note justifying the risk. Even despite their low forward P/E this is a stock that unpredictably up and down, that's not a company I want to own over the long run.

  • Report this Comment On March 15, 2012, at 11:10 PM, spwangsu wrote:

    Maybe I missed the part as you said. But, how many parts had you missed regarding this company in your article? Dare you say, you did not just on purposely trim some parts of the fundamentals to serve your purpose when you composed this article? Nowadays, how much can individual investors trust any analyts? Goldman ? Morgan stanley, Jim Crame? Com'on!

  • Report this Comment On April 08, 2012, at 5:39 PM, rsinj wrote:

    And now, after the hoopla dies down, we see that the Gordons just sold 600,000 shares this past week after the stock pulled back 30% from the spike, it's fallen another 7% just on Thursday, and 21% of the float was short as of March 15.

    Author lacks an understanding of some basic points, and just makes ambiguous statements like "Unfortunately, this remains a ridiculously volatile stock"" and "Stocks like this will swing wildly, taking investors emotions along for the ride, and that's no way to invest for the long term". He misses (minimally he skips over stating) the key point as to WHY those statements may be true. It's because there's less than 7 million shares outstanding, about 4.5 million float, and it trades on average 700,000 shares a day. Between March 9 and 19 it traded well over 1 million shares a day. Heck, on March 9, 12, and 13 it traded in excess of all shares in the public float each day - meaning it is just a daytrading toy. Likely there was a fair amount of short covering taking place during that time, which pronounced that upward spike.

    Personally, I think the fundamentals here are halfway decent. Let the stock pull back to something in the $5 to $7 range (look at the long-term chart), and then ease your way into it purchasing shares. It's got a dividend which is easily covered by earnings, there's negligible debt, and as we already know, sales/profit were up.

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