The Motley Fool Previous Page

Even Down 22%, This Stock Is Grossly Overvalued

Sean Williams
July 13, 2011

I don't know what's gotten into the coffee sector, but investors seem to like it. Whether it's the caffeinated beverages or the rising price of coffee beans worldwide, investors are sipping up coffee stocks like they're going out of style -- and it's producing some sky-high valuations.

Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , the name behind the Keurig single-serve K-Cup craze, has blasted to an all-time high and is currently valued in excess of 110 times trailing-12-month earnings. Peet's Coffee & Tea (Nasdaq: PEET  ) , another provider of roasted coffee beans in the U.S., is also trading in the stratosphere with a trailing P/E of 41 and a forward P/E of 34. Not even coffee giant Starbucks (Nasdaq: SBUX  ) or smaller chain Caribou Coffee (Nasdaq: CBOU  ) can escape the bullish action, with each stock up more than 40% over the past year. But next to Coffee Holding (Nasdaq: JVA  ) , these companies seem like they're at bargain-basement prices.

Even with yesterday's 24% drop, Coffee Holding, a manufacturer, roaster, packager, marketer, and distributor of blended coffees in the U.S. and Canada, still appears grossly overvalued. Now down 22% from its all-time high set earlier in the week, the company is still up more than 500% since the year began. I suggest we take a closer look at Coffee Holding so you can make up your mind whether this stock is just getting started or if, as I feel, shareholders are about to be burned to a crisp.

Company Coffee Holding
Price/Book 7.99
Forward P/E 29
PEG Ratio 1.76
Profit Margin (TTM) 3.1%
Levered Free Cash Flow (TTM) $0.98 million

Source: Yahoo! Finance.

On paper, the company's five-year growth projection of 11.6% and forward P/E of 29 seem reasonable. Heck, I can even swallow a PEG ratio of 1.76 without spitting up my coffee. Where the hint of overvaluation starts to become an unwavering stench is when we begin examining its recent growth, its margin