Tom Gardner's Motley Fool Hidden Gems asserts that investing in small but growing firms with almost no following can be wildly profitable. Since the newsletter began, it's walloped the market by more than 22%. Today's earnings news from Peet'sCoffee and Tea (Nasdaq: PEET ) may help explain why.
This small, mostly West Coast purveyor of caffeinated drinks put out a report even rival Starbucks (Nasdaq: SBUX ) could love. Sales were up more than 24% over last year's second quarter, and net profit rose 46% over the same period.
Peet's attributed the increases primarily to the introduction of new retail locations, followed by growth in existing locations. But don't let that fool you: Peet's isn't a cafe like Starbucks. It dispenses bags of fresh roasted coffee beans and carefully prepared tea leaves to the do-it-yourself caffeine connoisseur.
A breakdown of the numbers suggests that this strategy is working well. For example, sales to grocery stores that stock Peet's selections were up more than 47% year over year, more than half of which came from existing customers.
Yet that good news made little impression on investors or the media. The shares were down more than 3% as of this writing. And a check of Google News showed that a grand total of two media outlets (aside from us Fools) even bothered to write about the results.
I found that alluring, because it's exactly the kind of market behavior that suggests a Hidden Gem in the making. So I decided to do just a little more digging. I didn't have to go far, since Fool contributor Bobby Shethia did some fine investigative work on the company in June. In his analysis, Peet's remains a speculative investment whose shares are already premium-priced at 44 times full-year 2005 earnings. A substantial cadre of short sellers appears to agree; nearly 16% of Peet's available stock is currently sold short.
That means many investors fear Peet's is facing an uphill battle against outsized expectations. The stock has suffered as a result, and may continue to. But sometimes growth companies do defy the odds and continue to accelerate sales and earnings. In my opinion, Peet's has that potential. If it lives up to expectations while Wall Street and the media still have their heads turned, you can bet at least this Fool will be buying.
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Fool contributor Tim Beyers stopped mainlining caffeine when his oldest son was born. He hasn't slept well since. Sigh. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has an ironclad disclosure policy.