A Tale Of Two Coffee Companies

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 |  Includes: DNKN, GMCR
by: Cabot

By Elyse Andrews

By now, you’re probably sick and tired of hearing about how the U.S. economy is still lagging, how financial troubles in Europe are roiling stock markets around the world and how we’re all going to you-know-where in a hand basket! So I’m not going to discuss that at all today.

Despite all the negativity that’s in the news right now, there are some bright spots among stocks in certain industries. Take coffee for instance, people like to drink it whether we’re in a recession or business is booming. And that’s why I want to discuss two stocks in the sector today: Dunkin’ Brands (NASDAQ:DNKN) and Green Mountain Coffee Roasters (NASDAQ:GMCR).

Both companies are headquartered in Cabot’s area of the country, New England, and both are capitalizing on trends in the coffee industry. Green Mountain has found great success with its Keurig coffee makers and K-cup coffee pods, a true razor/razorblade business model. While Dunkin’ Brands is looking to expand beyond its Northeast stronghold into the rest of America and beyond.

Green Mountain’s story isn’t new, but that doesn’t mean it’s old news. The company sells coffee- and tea-drinking customers its Keurig coffee makers, which require its K-cup coffee pods to brew a cup of joe. Green Mountain has its own branded coffee, but where the company has really made waves lately is in inking deals with other coffee companies, like Starbucks (NASDAQ:SBUX) and … Dunkin’ Donuts!

Besides the Green Mountain deal, Dunkin’ has big plans to grow in the future. The company operates mostly through franchises, which are dense in our neck of the woods (I pass no less than five locations on my way to work each day), but scarce elsewhere in the U.S.

Dunkin’ Brands currently has 16,000 locations, about 10,000 of which are Dunkin’ Donuts (the rest are Baskin-Robbins). That may sound like a lot, but the majority are in the Northeast, leaving much of the country with locations few and far between. In fact, in the Western U.S., there is just one location for every 1.2 million people, while in the Northeast, there’s one location for every 10,000. And that’s to say nothing of the dearth of locations in international markets.

Now, as to the stocks of these companies.

GMCR is no spring chicken, but it could still have weeks, months and years of growth ahead. Here’s what Cabot Market Letter Editor Mike Cintolo had to say about GMCR (in which his subscribers have 40% gains) this week:

We mentioned above that the market’s crosscurrents are likely to continue, and a good example of that is with the action of Green Mountain Coffee (GMCR). Today the stock actually sold off hard on no obvious news, though this comes on the heels of a nice positive reversal last week. (If anything, there was good news as the line of Keurig-powered Mr. Coffee single-cup brewers is set to expand.) All in all, if you have a profit and have already taken partial profits, you should grit your teeth and give the stock room to gyrate. Our patience isn’t unlimited, especially if the market’s rally continues, but we’ll give the stock a chance to shake off the sellers and resume its major uptrend.

As for DNKN, it’s a relatively new issue that just came public this summer. Here’s what Mike had to say in the most recent issue of Cabot Top Ten Trader:

DNKN came public in late-July and since that time has done … next to nothing. But in this market, that’s been a good thing; the fact that shares have consolidated in a relatively tight range (from 25 to 30 or so) at a time when the market has been whipping up and down on a weekly basis tells you that some big investors have been accumulating shares. If you own some, hold on above 25. If you don’t, you could nibble here; the real action will start if DNKN breaks above 30, and the market shows continued improvement.

As you know, the market has been on a rollercoaster ride for more than two months. Since its early August crash, stocks have been pushed down to the basement, then up, then down, but we are starting to see some stability and possible upside in the market. We’re not jumping in whole hog just yet, but if the market’s action stays positive, we could dip a toe in soon.

To learn more about top stocks like GMCR and DNKN, which are both currently featured in Cabot Top Ten Trader, click here.