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?