Green Mountain Coffee Roasters, Inc. (NASDAQ: GMCR) has nearly defied logic, even for a market where the news has become irrelevant and bad news and good news alike lead to the conclusion of “…. and therefore you should buy.”  The coffee stock craze has helped Green Mountain have a phenomenal year, but the moves in other coffee-related stocks has been unmatched.  Diedrich Coffee Inc. (NASDAQ: DDRX) is one of the market’s top performers now, and the share performance has been unbelievable in Caribou Coffee Company, Inc. (NASDAQ: CBOU), Peet’s Coffee & Tea, Inc. (NASDAQ: PEET), and Coffee Holding Co.Inc. (NYSE Alternext: JVA).  The interest in the sector has been strong enough that even Starbucks Corp. (NASDAQ: SBUX) hit a high not seen since last September.

Diedrich Coffee  has transformed itself into a coffee roaster and wholesaler from a retailer.  Its Gloria Jean’s Coffee domestic franchise sale closes next week and it exited its own franchises under the Diedrich’s name in 2006.  It is now just going to be a roaster of roaster and wholesaler of its Diedrich Coffee, Gloria Jean’s Coffee and Coffee People brands and has Quick Dispense as its master distributor.  With all top performers, the stock performance is massive.  Shares are at $16.65 after a 2% drop today, yet the 52-week trading range is $0.21 to $17.23.  If you can believe it, this is up nearly 50-fold year to date and its market cap is only about $91 million.

Coffee Holding Co.Inc. (NYSE Alternext: JVA) is down almost 7% at $3.64 today after the company reported Q2 earnings at $0.07 EPS and revenues fell by 1.6% from last year to $17.9 million.  We have already seen 8-times volume because this stock has rallied sharply from lows as the 52-week range is $0.56 to $4.98 and its market cap is just under $20 million.  It seems that the statement of  “We believe that the problems from last year are now fully behind us and we’ve now got the wind at our backs” may have been priced in.  This one is an integrated wholesale coffee roaster and dealer that sells at multiple price points and multiple flavors.

Caribou Coffee  is a retailer, and has been a troubled retailer for quite some time.  Amazingly, this  stock is hitting 52-week highs again today after going above its 52-week range of $1.10 to $7.09.  Its $132 million market cap compares with $253.8 million in sales for 2008. The problem is that Caribou Coffee has been losing money until recently and its balance sheet is tiny.  The company ended the quarter with $10.8 million in cash and it has essentially no long-term debt. As of the most recent data, it had 515 coffeehouses with 101 of those being franchise locations.

Peet’s Coffee & Tea is also in the boat and close to challenging new recent highs.  With a 6% rise today to $28.11, its 52-week range is $17.79 to $29.75 and its market cap is $about $363 million.  Peet’s 2008 sales were $284.8 million.  The unique spot here is that it has been a quiet stock before this and it is not a troubled company.  Peet’s is profitable now, has been profitable in the  past, and is expected to be profitable in the future.  With estimates at $0.99 EPS for 2009 and $1.14 for 2010, its forward estimates are 28-times earnings this year and about 25-times earnings for 2010.  That is a small pool of analysts, but those numbers might make some investors raise their eyes.

Getting back to Green Mountain Coffee Roasters…. For most of the last two years, Green Mountain traded between $20 and $40 after having a great run from under $10 just five years ago.  But earlier in 2009 this one tried to break-out above $40.00 but the bear market and killer economy kept a lid on it.  That all changed after the stock market started rallying in March.  Shares then skyrocketed in late-April and now sit north of $86.00 today.  A 3-for-2 stock split in May followed a late-April earnings beat and guidance raise.  Even large amounts of insider selling in the stock has not sent Green Mountain back to earth.  And as you will see below, the short interest is massive yet has come down from earlier in the year.

Green Mountain’s market cap is now $2.16 billion.  With forward earnings estimates of $1.01 for 2009 (September-end) and $1.42 EPS projected for 2010, its forward estimates are 85-times projected current year earnings and 60-times next years earnings.  This one has a rather large short interest which has actually shrunk: 6,411,254 shares as of mid-May and was over 10 million shares in March.  Short sellers are still betting against it, but that is after getting their fingers burned.

So what do we expect from here?  We can talk about stock prices and earnings multiples, but without an industry trend snapshot it is worthless.  Coffee prices have seen some extreme lows compared with  when the craze had these guys paying through their teeth for coffee day in and day out.  Energy costs have also been far lower for them, yet the question is whether or not that stays.  Energy prices have risen, and it looks like coffee prices have come off their lows as well.  The economy is getting better, so more buyers of coffee every day is a help even if there are fewer and fewer workers heading to work each morning as layoffs and unemployment are continuing to rise.  Prices may have gone so low that many roasters would have locked in their fixed prices for as long as they could, but that assumes the companies actually locked-in.  It seems as though the current prices of the smaller coffee stocks would entail the criteria of a perfect storm continuing without interruption.  After all, it only takes one small puncture to burst a bubble.

If this interest in the sector continues, then Starbucks Corp. (NASDAQ: SBUX) won’t just be hitting 6-month highs.  At $14.85 today, its 52-week range is $7.06 to $18.56.  Starbucks now has a market cap of almost $11 billion again, but its forward earnings multiple is over 20-times projected earnings based on the new prices.  We also noted recently in our “10 Stocks Under $10” Weekly Newsletter that Einstein Noah Restaurant Group, Inc. (NASDAQ: BAGL) won’t stay under $10.00 for long if the coffee traders decide to trust this casual dining theme as a turnaround stock… which serves pretty decent coffee and has many of the holes filled in a turnaround model.

As many market experts say, “Irrationality can outlast almost everyone’s bets on common sense.”  Having high valuations also might not matter at all during a screaming bull market.  As proof, go find an investor who is interested in value over momentum today.  So the rally can last based on what we have seen in history.  But the notion that these stocks can repeat their performance we have already seen would be what Mr. Spock calls “illogical.”  Do not be too surprised when you see waves of insider selling in many of these companies after lock-up windows start to open.

Sometimes you see moves which are more than puzzling.  That is how this sector feels after some of these exponential runs.

JON C. OGG
JUNE 2, 2009

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