Earlier this week, I wrote an article in which I suggested that investors should be satisfied with the large returns from Coffee Holding Company (NASDAQ:JVA), and should welcome a slow and steady return. I explained that investors seem more concerned with its past performance, and its run-up to $30, than its current return of more than 50% YTD. However, after spending some time looking at the charts there is an obvious trend developing, which can be seen during its previous run to $30.
JVA is one of the more frustrating stocks to own. It has the ability to change directions in the blink of an eye with a beta of 2.34 (134% more volatile than market) and a considerably small float. The stock can be easily manipulated and it doesn't take a lot of pressure to entice strong movement.
Just about everyone who owns JVA is very familiar with its June 2011 run. In a period of just over one month, the stock traded from under $8 to over $30 a share. It was driven by a variety of factors including optimism and buying pressure among coffee stocks Green Mountain Coffee Roasters (NASDAQ:GMCR) and Starbucks (NASDAQ:SBUX). The stock was also driven higher by a volatile market and an increase in volume due to momentum traders. But most importantly it was driven higher by earnings that reflected the company's fundamental improvements.
When the company posted its quarterly results on June of 2011 it showed significant improvements to the company's balance sheet along with major top and bottom line growth. On June 2011 the company posted revenue growth of 88% and net income growth of 49% year-over-year. The market was ecstatic and the stock returned unprecedented gains over the next month.
Now, fast-forward to Friday March 9, 2012, when the company posted revenue growth of 120% and net income growth of 50% year-over-year. Its current report is seemingly better with even more growth on its top and bottom line and significant improvements to its cash from operating activities, cash position, and overall balance sheet.
When you look at the earnings reports of JVA for both June 9 2011 and March 9 2012 it appears that the current quarter shows more progress. Its current quarter includes better revenue, income, cash, etc. compared to the quarterly results that enticed such a strong reaction within the stock. And although it's impossible to know for sure if JVA will continue to trade higher, there are a number of other similar technical indications to suggest its pullback on Wednesday was nothing more than JVA slowing down to catch its breath (or investors taking profits).
|June 8 2011||$8.50||341.18k|
|March 8 2012||$7.85||74.6k|
As you can see from the chart above, the dates, price, and volume is that of JVA. It shows one day prior to the quarterly results that resulted in such large gains. Obviously, the price and volume of JVA at the two different times is different, yet close. On both dates the stock was trading near $8 a share, the only difference is the volume, in which JVA was trading with much less volume on March 2012. However, the point of this first chart is to simply give a starting point for what happens next.
|June 9 2011||$12.14||3.83M|
|March 9 2012||$10.60||4.36M|
The chart above reflects the performance of JVA on the dates shown, which is the first day after reporting earnings. On both dates the stock traded higher, much higher, with significantly more volume. On June 9 2011 the stock closed much higher than on March 9, 2012, however, JVA was also trading higher on June 8, 2011 versus March 8, 2011.
On March 9, 2011 the stock had slightly higher volume, and shows a much larger jump in volume over the previous day. In my opinion, it's because investors had traded the news back in 2011 and were trying to buy the stock prior to it trading higher. Either way, the stock posted large gains on both days following earnings, June 9 a 43% gain and on March 9 a 35% gain.
|June 10 2011||$13.26||5.02M|
|March 12 2012||$12.86||5.67M|
The chart above reflects the fact that on both dates JVA continued its trend higher, 2 days after earnings were announced. On June 10 it posted a gain of 9% and on March 12 it posted a gain of 22%, over the previous day. The level of gains is irrelevant, but what's important is that both stocks were trading near the same level, two days after reporting earnings. On both dates the stock traded with volume over 5 million and within $0.40 in price.
|June 13 2011||$13.33||2.155M|
|March 13 2012||$13.27||5.05M|
This is where it gets interesting; it shows an obvious level of resistance near this range, despite both stocks exceeding this level during the trading day. On June 13 it traded with less volume as a result of the stock trading flat. But on March 13 the stock traded with 5 million shares as a result of it posting gains. I find it interesting that on March 13 JVA traded within pennies of the stock's price on June 13, which is the third day following earnings.
|June 14 2011||$12.39||1.108M|
|March 14 2012||$11.92||1.60M|
This may be the most important day of the trend: It's the day of the pullback. It's when the men are separated from boys and those who are fearful take profits and go home. On both days (4th day after earnings) the stock pulled back by a substantial amount as investors took profits. On both days the stock traded with much less volume over its previous day. However, on March 14 the stock traded with more volume compared to June 14 and lost a larger amount.
In my opinion, it shows the level of fear among investors along with the number of investors who are playing this stock similarly to June 14. I think investors learned from their past experience, when JVA traded higher, and assumed that it would follow this trend. If so, then we can assume what will happen next.
|June 15 2011||$13.28||1.108M|
|June 16 2011||$14.09||1.509M|
|June 17 2011||$15.59||2.139M|
Unfortunately, there is no way to know for sure what will happen tomorrow, but if JVA continues to follow the same trend, then its performance may look similar to the above chart. The chart above shows the performance of JVA on day 5, 6, & 7 after it reported earnings on June 9, 2011. After JVA pulled back on June 14, it then recovered and traded higher to a range around $16 over the next few days. Then, the rest is history, and by mid July of 2011 JVA had continued its trend and reached a price over $30.
As I said, I don't know what will happen tomorrow, or the next day, but JVA is following the same trend as it did back in June of 2011. The stock has now posted its one day of loss, and if the trend were to continue, then JVA should trade higher on Thursday, and then proceed for the next few days.
Trends in the market are rarely the same, because conditions within the market are constantly changing. However, this is one of the very few trends that is so obvious that any investor could identify it. I think JVA is following this trend, and although I slowly entered the water on March 9, when I bought just 275 shares, I have since added to my position by a significant margin. As an investor, I think this trend is worth watching, and if the stock were to trade higher on Thursday, then I would definitely have it on my watchlist for Friday and Monday.
Disclosure: I am long JVA.
Disclaimer: The information in this article is for informational purposes only. Any investment decision should be discussed with your financial advisor.