From a purely technical perspective, there are a lot of reasons why Diedrich Coffee (DDRX) might be tempting to short. Shares are up over a hundred-fold from their 52-week lows of $0.21. Resistance in the 25-26 area looks like it may hold, and momentum is fading.
But when you look beyond the numbers, the trade looks a little dicier. 90% of Diedrich’s revenues come from "k-cups," those little single-serving beverage products developed and licensed by Green Mountain Coffee Roasters (NASDAQ:GMCR). Diedrich expects $90-$95 million in revenue for the fiscal year ending June 30, 2010, about a 45-50% increase year-over-year. K-cup sales will undoubtedly be the driver.
K-cup demand growth depends upon the growth of k-cup coffee machines. Each coffee machine creates an annuity of demand for the consumables sold by companies like Diedrich. At least in terms of retail k-cup machines, those sales appear to be highly seasonal. If the google trends chart is any indication, I expect another big holiday season for k-cup machines:
And all of those machines need a k-cup to produce every cup of coffee. That’s where Diedrich comes in. On Amazon.com, for example, Diedrich’s Coffee People and Gloria Jean’s brands account for 6 of the top 10 bestselling grocery items returned for the search "k-cups":
Bottom line: while the technical momentum for Diedrich Coffee may have slowed, I’m not interested in shorting DDRX ahead of what could be a very big sales push for k-cup makers and consumables.
DISCLOSURE: no position.