Peet's Coffee: One Expensive Cup Of Java

Oct.24.11 | About: Peet's Coffee (PEET)

As the market has again reached the top end of its trading range, I am actively looking for overvalued stocks to short as I think the market is overbought and vulnerable to a pullback. One stock that looks ripe for a sell-off is Peet’s Coffee (NASDAQ:PEET).

Peet’s Coffee & Tea – “Peet’s Coffee & Tea, Inc. operates as a specialty coffee roaster and marketer of fresh roasted whole bean coffee and tea in the United States. It offers whole bean coffee and related products consisting of products for home brewing, tea, and packaged foods, and beverages and pastries. The company also provides brewing equipment for coffee and tea, paper filters and brewing accessories, and branded and non-branded cups, saucers, travel mugs, and serve ware. Peet’s sells its products through various channels of distribution, including grocery stores; home delivery, office, restaurant, and food-service accounts; and company-owned and operated stores. As of January 2, 2011, it operated 192 retail stores in California, Colorado, Illinois, Oregon, Massachusetts, and Washington." (Business Description from Yahoo Finance)

Eight reasons I am short PEET at $334 a share:

1. It is selling at the very top of its five-year valuation range based in P/B, P/S and P/CF.

2. PEET looks stuck at the $60 level over the last few months. (see chart)

Click to enlarge

Click to enlarge

3. Insiders have sold 42% of their shares in the last six months. There have been no insider buys over that time period.

4. The company had zero operating cash flow growth from FY2008 to FY2010.

5. Peet’s projected five year PEG is 2.1 which is a 25% premium to its five year average.

6. Each of its outlets is being valued by the market at approximately $4mm, far above replacement value.

7. The company margins are vulnerable to rising coffee prices.

8. At $60, PEET is above analysts’ price targets. The mean analysts’ price target is $54 on Peet’s.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in PEET over the next 72 hours.