This Small Cap Will Scare You No More

Big things do come in small packages. Diedrich Coffee (Nasdaq: DDRX  ) is a fine example of that axiom -- in more ways than one.

First, the coffee roaster decided to refocus on selling Keurig K-Cup coffee. Diedrich has become a leading provider of coffee for those Keurig quick-and-easy cups o' Joe under license from Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , and Diedrich has staged a massive turnaround based on those tiny servings of black gold. That's one small package for you.

As a direct result of that fundamental little revolution, Diedrich's stock has bounced back like no stock I've ever seen. Coming back off a 52-week low of $0.21 per share this spring, Diedrich's market cap was a paltry $1.2 million at one point. If that's not a small package, I don't know what is. And now the turnaround is complete and the stock sports a price near $25.80 per share.

If you do the math, you'll see a heart-stopping 12,200% return on your investment if you were brave and lucky enough to buy during Diedrich's darkest hour. And it is virtually locked in, because today's price includes the 28% premium that Peet's Coffee & Tea (Nasdaq: PEET  ) is paying to acquire the company. Diedrich is trading very close to Peet's $26 cash-and-stock offer, leaving little room for arbitrage.

The buyout must have come as a shock to Diedrich's management. Less than two weeks ago, Diedrich announced that CEO Russ Phillips was stepping down. Recruitment specialist Korn/Ferry International (NYSE: KFY  ) had started looking for a replacement. And now it's a moot point.

Peet's distribution system plus Diedrich's hot products and top-notch coffee roasting processes should add up to something greater than the simple sum of the parts. Sure, even with Diedrich under its wing, Peet's is still a far cry from the multibillion-dollar sales of Starbucks (Nasdaq: SBUX  ) , but the single-serving business is booming. Diedrich reported sales of $62 million in fiscal 2009 but expects to deliver more than $90 million in 2010 revenue.

Don't kick yourself too hard if you missed out on Diedrich's extravagant gain. Longtime shareholders are doing fine, as the stock has delivered better than 440% gains over the last five years and 640% over the last three. But as we've seen, in between, Diedrich teetered on the brink of extinction.

This is exactly the kind of roaring-back-to-life move you're hoping for if you are buying Sirius XM Satellite Radio (Nasdaq: SIRI  ) or Crocs (Nasdaq: CROX  ) these days. Feel free, pal. But remember the sordid stories of Circuit City and Nortel Networks before you hit that "buy" button: Some turnarounds never turn.

Diedrich scared the heebee-jeebies out of fellow Fool Dan Caplinger after that roller-coaster ride. Do you see any surefire turnarounds among the other monster stocks of this Fooloween?

Fool contributor Anders Bylund holds no position in any of the companies discussed here, though he briefly owned a few shares of Diedrich back in 2005. He is missing out on some huge gains because he didn't have the nerve to sit out the bad times. Green Mountain Coffee Roasters is a Motley Fool Rule Breakers selection. Starbucks is a Stock Advisor pick, and the Fool owns shares of it. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (7) | Recommend This Article (5)

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 November 03, 2009, at 2:46 PM, stocknblondes wrote:

    I fail to see an actual " point " in or too this article?

  • Report this Comment On November 03, 2009, at 4:56 PM, PCShareDotCom wrote:

    Some people still don't get it. Why do you think the Fools and Street constantly mention SIRI? SIRI, even with its volatility, is one of the most popular stock being traded. It's one way for them to get their articles read, by mentioning high profile stock and being controversial. Doesn't matter if you praise their article or piss at it, It's a traffic generator...

  • Report this Comment On November 03, 2009, at 5:10 PM, stocknblondes wrote:

    true PC I think you nailed it..what else do they have to write about? certainly not about WS corruption aka the White Collar Taliban.

  • Report this Comment On November 03, 2009, at 5:16 PM, dedmunds wrote:

    Bylund,

    Your one of the worse article writers that I have seen. All your postings have no meanings unless your out to smooth yourself!!!

    HORRIBLE!!!

  • Report this Comment On November 03, 2009, at 5:36 PM, 55000 wrote:

    i am so sick of hearing you fools bash the same companies over and over again.....what about you guys? How much money are you making and what are your numbers for this quarter? You don't have any do you?????

  • Report this Comment On November 04, 2009, at 8:48 AM, cycle63 wrote:

    Doom your shorts must be through the roof. It is clear to see this company is moving to profitability. It may not be this quarter or the next, but the numbers are improving each quarter.

    While I do agree they need to do a reverse split, I don't believe that will happen until they either hit the one dollar mark or there is a true risk of delisting.

    Optimistic (LONG) on SIRI

  • Report this Comment On November 04, 2009, at 9:45 AM, cantbefoolish wrote:

    That makes it 3 negatively biased posts about SIRI, by MF, on a day that it went up a penny and two days before the earnings report. Any coincidence? SEC, hello?

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