The house rules are simple in this weekly column.

  • I bash a stock that I think is heading lower.
  • I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Jammin Java (OTC BB: JAMN.OB).

No woman, no grind  
If you've visited Yahoo! Finance over the past few weeks, you've probably seen ads with a smiling Rohan Marley. Bob Marley's son has had a pretty extraordinary life. I graduated from the University of Miami the year before he showed up as a head-turning linebacker. He didn't cut it in the NFL, but he has managed to carve out a compelling career in music and entrepreneurship.

Marley's awesome, and I think it's great that he's cashing in on his family's pedigree by cranking out Marley Coffee.

My beef this week is simply how the power of online promotion has catapulted a speculative stock toward a valuation that is unsustainable given the current fundamentals.

The Lautner Letter is the website putting out the report, paid by a third-party Jammin Java shareholder to cover the company for six months. Bullish bias much? The report itself plays on the strengths of gourmet coffee stocks. It points out how Caribou Coffee (Nasdaq: CBOU) was trading for $1.32 two years ago. Shares of Green Mountain Coffee Roasters (Nasdaq: GMCR) could have been bought for less than a split-adjusted $3 five years ago. There's also Diedrich Coffee, which went from trading as low as $0.21 a share to being snapped up by Green Mountain at $35 per share in a bidding war with Peet's Coffee (Nasdaq: PEET).

The success of Caribou, Green Mountain, and Diedrich as investments rests solely on their early K-Cup leadership in serving Green Mountain's Keurig single-serving platform. Marley Coffee -- for now -- is only available in whole beans.

Missing from the report is that Jammin Java has had no revenue through the end of its fiscal third quarter, which ended back in October. Sales are starting to trickle in now, but we don't know how much. The company's three-month deadline to file its fiscal year financials came and went last week.

The lack of actual verifiable revenue hasn't gotten in the way of the impact behind The Lautner Letter's promotional campaign. The stock is a six-bagger this year! The same stock that didn't even trade some days in January trades millions of shares daily now.

Jammin Java had 98.9 million shares outstanding by the end of October, but 30.9 million shares were cancelled in a December transaction. We should have a clearer snapshot of just how many shares are outstanding by the time the annual report is ultimately filed, but we're still talking about a revenue-less company with a market cap of more than $200 million.

Is it justified? Jammin Java is brewing some good news lately. It's been able to get its coffee bean bags into and in recent weeks. It's also selling coffee through its own website, though the site is stocking more Marley CDs, T-shirts, mugs, and grinders than actual java.

I'm not trying to dismiss Jammin Java's chances. I get the killer brand. Rohan rocks. However, this isn't the ground-floor opportunity that naive investors think they're buying into. We're already at the nine-figure ceiling!

If you want proof, let's go weigh the same stocks being used to justify Jammin's appeal. Jammin already commands a market cap that is more than Caribou does today. Really. Even at its $35 buyout price, Diedrich was just a $290 million deal. Caribou and Diedrich have proven and profitable pedigrees. Jammin Java's coffee may carve out a nice niche here, but this whole stock-promotion campaign is woefully deceptive by failing to point out that its starting line is near the finish line of more established gourmet coffee speedsters.

Enjoy the coffee but stay away from the shares until the paid promoters move on and the stock settles at a more reasonable valuation.    

Good news
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 the heave-ho. Let's go over the three fill-ins.

  • Starbucks (Nasdaq: SBUX): The company that popularized gourmet coffee in this country is still a barista beauty. I may have knocked the java heavy when it was saturating stateside markets during the early recessionary days, but it's in a good groove now. Revenue, earnings, and margins are all improving. Comps at Starbucks rose 7% in its latest quarter, and that's stacked on top of a similar 7% store-level spurt a year earlier.
  • (Nasdaq: AMZN): Jammin Java issued a press release last month, bragging that its allocation for a Lightning Deal sold out within its designated hour. Selling a ton of half-priced coffee beans isn't a bad thing, but it's a better testament to the power of Amazon to sell the invisible than anything else. Revenue soared 38% in its latest quarter. Margins are taking a breather as the leading online retailer invests in turning its Kindle e-reader into a mainstream product, but Amazon's growing global girth is impressive.
  • Green Mountain: Caribou and Diedrich rode Green Mountain's coattails to higher ground. It's nice to see that the coat has never looked better. The Keurig parent posted blowout quarterly results last week. Revenue more than doubled, with adjusted profitability soaring 131%. Starbucks struck an exclusive deal to be the only "super-premium" provider of K-Cups earlier this year, a move that may nix Jammin Java's chances unless it comes down dramatically in price. Either way, Starbucks' deal validates Keurig as the only single-cup platform that matters.   

I'm sorry, Jammin Java. Your valuation is Jamaican me crazy.