By Michael Williams
One of the best techniques for picking profitable stocks is the ability of a company to withstand economic pressures by offering a product that consumers want or need, even during the difficult times. Coffee is one such product, and investors in coffee stocks can expect to see their portfolio brewing up some extra profits during 2012. Among the most active companies in the industry, Starbucks Corp (NASDAQ:SBUX), McDonalds Corp (NYSE:MCD), Caribou Coffee (NASDAQ:CBOU), Dunkin’ Brands Group (NASDAQ:DNKN) and Peet’s Coffee and Tea (NASDAQ:PEET) are some of the ones that should percolate to the top of the market in this lucrative industry.
Starbucks is an interesting company. The leaders in the industry, the company continues to excel in spite of an unsteady market and higher than average prices for its products. SBUX is currently trading at $46.72 per share, just under its 52-week high of $47.04. The company has a solid PEG of 17.80 and a 1-year target of $47.48.
This stock seems determined to make its own rules. SBUX has traded above its 200-day moving average for nearly all of the past year, and has only dropped below its 50-day average on selloffs. The share price continues to climb, and even though the 1-year target reflects a modest 10% increase, investors should watch for signs that it will continue its climb and blow past that target.
While consumers may think of Big Macs and McRibs when they hear McDonalds, many investors think of coffee. McDonalds has been wildly successful with its McCafe coffee shops. As one analysis states, “McDonald's specifically noted that growth was largely driven by this high-margin [coffee] segment. In their recent third-quarter conference call they outlined global expansion plans for McCafe.”
This development is a big part of McDonald's continued growth in this profitable sector. The company, with an upward trend that is very similar to that of Starbucks, is supported by a steady climb in share price that is seen in both its 50-day and 200-day moving averages. McDonalds has a very solid PEG of 3.87, a current share price of $100.60 and a 1-year estimated target of $103.81. The company paid a dividend of $2.80 and had a yield 2.8%, and its plans to expand its McCafe line overseas is lending support to its position as a strong coffee investment. While McDonald's can co-exist successfully alongside Yum! Brands (NYSE:YUM) in the fast food marketplace, the company has a significant opportunity to leverage its brand into the fast coffee space, given its less cost-effective competition.
Another company that features specialty coffee shops, Caribou is considered by many analysts to a Midwest brand, so much so that when talking about Dunkin’ Brands expansion, one writer says, “The Midwest is decidedly Caribou Coffee country… If Dunkin' has plans of expanding to [this region], there is huge competition already in place.” At $13.84, Caribou is trading in the middle of its 52-week range, has a PEG of 4.98 and a one-year target of $18.50.
There are some questions about Caribou’s ability to sustain its run. The company’s share price has been more volatile than its competitors, and recently, it is showing signs of decline. In October 2011, See It Market wrote, “Caribou’s stock chart is typical of a blow-off top. If long, watch the 11-12 dollar area closely, as this is an important trendline support band.”
Dunkin’ Brands Group
What goes together better than coffee and donuts? Apparently, Dunkin’ Brands thinks the answer to that is, “Nothing!” Already a large chain with around 7,000 stores throughout the United States, the company has announced a plan to double that number within the next 20 years. That decision, coupled with some solid metrics, makes Dunkin’ an intriguing prospect for investment.
Dunkin’ Brands, much like McDonalds, is known for products other than its coffee; however, the coffee is an important part of their business. Not only does Dunkin’ sell coffee in their donut shops, they sell bagged coffee in a growing number of grocery stores throughout the US. Recently trading around $25.50 per share, DNKN is close to the bottom of its 52-week range and appears to be trending upward. The 1-year target is $29.10 and the company currently has a PEG of 70.98. Although the 50-day average has been trending downward, investors should follow the stock as both its 10-day and 20-day averages are starting to climb.
Peet’s Coffee and Tea Inc
If the only adrenaline rush an investor wants is from his morning cup of coffee, then Peet’s Coffee and Tea might be a strong consideration. Like Starbucks and the other heavyweights in the industry, Peet’s has done nicely over the past few years. While there isn’t any reason for alarm, a flattening of the 50-day and 200-day averages seem to suggest a slowing of the company’s recent growth.
Other numbers seem to be backing up that conclusion. Although the company has a PEG of 30.68, It has a one-year target of only $56.40, a drop of about 4% from its current price of $58.60. Analysts are lukewarm as well, with most holding their positions for the past 3 to six months. With heavy competition and a chart that seems to be flattening, it may simply be better to maintain positions on the stock at this time.
Looking for Hot Profits with Coffee Stocks
This is an aggressive market, and coffee continues to be a hot commodity; most consumers are unwilling to give up the cup of java, meaning that demand is likely to retain its strength. Although a number of the companies in this sector appear poised for growth in 2012, Starbucks, McDonalds and Dunkin’ Brands are the ones that look like they will “brew up” the best returns in the months ahead.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.