Smart investors love coattail plays, as long as there's always a pair of scissors handy.
If something works for a specific company, there are often secondary companies that can cash in on the trend. Market watchers who are fortunate enough to spot the wave early can hop on to the piggyback plays for huge gains.
However, sometimes the coattail stocks outrun the originator that donned the coat in the first place. When that happens, I call the laggard out in this weekly column.
I'm no disgruntled coat-checker, though. I'll slam a stock, but I'll also come right back with three replacement stocks that I believe will perform even better.
Who gets tossed out this week? Come on down, Diedrich Coffee
You can't spell Diedrich without D-I-E
Shares of Diedrich took an 18% hit yesterday, after the coffee maker announced its fiscal fourth-quarter results. It was a decent report, on the surface. Revenue soared by 57%, and a net profit obliterated the previous year's sharp deficit. We'll look at what happened to cause the drop in a moment.
Diedrich has repositioned itself as one of Green Mountain Coffee Roasters'
In the past few months, Diedrich has been a bigger winner than Green Mountain itself has. Sure, Diedrich is the company behind some of the most popular K-Cup choices, with its Coffee People Donut Shop and Gloria Jean's hazelnut-flavored brews. However, this is a peculiar case in which the coattail has been the better investment -- by far -- than the coat wearer.
Diedrich shares began the year in the penny-stock bin at $0.36. It closed at $19.85 yesterday, a whopping 5,500% increase in that time. Green Mountain has more than doubled in 2009, but it's clearly no ridiculous 55-bagger.
That brings us to Diedrich's drop yesterday. The company's guidance for fiscal 2010 calls for revenue to surge 44%-52% higher, as it earns between $0.90 and $1.00 a share.
Growth investors have to like these numbers. The stock is trading at a forward earnings multiple of 20 to 22, yet it's growing its top line at more than double that pace. However, Green Mountain's guidance for 2010 calls for a 65% to 70% surge in K-Cup portion pack shipments. Even if we consider that each company works on different fiscal years, shouldn't the K-Cup-centric Diedrich be at the very least keeping up with refill shipments?
The problem is that there are -- and will be -- more coattail-hoppers. Green Mountain recently acquired Tully's and has a healthy relationship with Caribou Coffee
Diedrich trades at an attractive valuation relative to its growth today, but there are way too many derailment catalysts looming in the future.
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting tossed. Let's go over three new fill-ins.
- Green Mountain Coffee Roasters -- I may as well start with the K-Cup company, because it's the one player that will clearly profit from a broader range of licensed Keurig brewers and a greater number of K-Cup partners. Green Mountain isn't exactly cheap. The java junkie is looking to earn between $1.70 to $1.80 a share next year, pricing the stock at a lofty 38 to 40 times next year's projected profitability. However, it's actually growing even faster than those multiples. Green Mountain isn't just recession-resistant. It has thrived on the recession, with premium-coffee fans embracing the savings and convenience of single-cup brewing.
(NASDAQ:HAIN)-- You have to love the coattail play that doesn't know it's one. Hain is a maker of organic and natural food products. This made it a coattail play when Whole Foods Market (NASDAQ:WFMI)and Wild Oats were all the rage. However, it's also the company behind Celestial Seasonings teas. Yes, they are available in K-Cup form through Green Mountain. Hain isn't growing as quickly as the other coattail-riders are, but that is by design, given the company's wide product lines. Hain is fetching just 16 times this year's bottom-line estimates and 14 times next year's guesstimates.
- Caribou Coffee -- Analysts can't keep up with Caribou's good fortune. It has landed well above Wall Street's profit targets in each of the past three quarters. It has embraced a K-Cup-peppered surge in commercial sales -- up 28% in its latest quarter -- but it hasn't turned its back on its empire of 522 premium coffeehouses. Unlike Green Mountain, Diedrich, Peet's, and Starbucks, Caribou can be had for less than 20 times fiscal 2010's earnings.
Which of the stocks we've discussed here do you think will make your portfolio percolate the most? Let us know in the poll below.
Green Mountain Coffee Roasters is a Motley Fool Rule Breakers selection. Starbucks and Whole Foods are Stock Advisor picks. Starbucks is also an Inside Value recommendation, and the Fool owns shares of it. Try any of our Foolish newsletter services free for 30 days.
Longtime Fool contributor Rick Munarriz always takes out the garbage. He owns no shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.