Expecting Large Gains For Coffee Stocks Over The Next Week

Includes: GMCR, JVA
by: Brian Nichols

Over the last 3 months I have been particularly bullish regarding the economy. Nevertheless, I doubt that the market will break through its current range unless earnings are much greater than what analysts expect.

Since I believe that the major indices have reached peak levels within their trading range during the last 2 months, I believe that loss is most likely to occur during the next week, unless earnings drive the markets higher.

The markets are still presenting a significant amount of value for the long-term investor; however, for the short-term trader, next week could result in losses for the majority of stocks that trend with the market.

That being said, there are two stocks that I believe could trend higher because of recent performance during the last 3 months. Green Mountain Coffee Roasters (NASDAQ:GMCR) and Coffee Holding Company (NASDAQ:JVA) have shown a tendency to trade with the price of coffee, which sometimes trends against the market. During the month of August, when the Dow Jones was crashing lower and creating a new trend, the price of coffee increased by more than $50 from August 8 to August 31. The prices of these two stocks have been difficult to predict, but because of recent stock performance I believe that both stocks will trend significantly higher over the next week as I believe that the price of coffee will continue to trend higher.

Coffee closed at $237.65 on Thursday for an increase of $8.20 as it trended against the market throughout the day. Over the last 6 months, coffee has trended lower after reaching a price above $300 in May. However, the commodity is still trending significantly higher than it was in 2009 and 2010 when it traded in a range around $150. The large gains over the last year have resulted in both JVA and GMCR posting incredible gains during this time, with improved fundamentals. And because of the commodity's recent surge from its lowest trading range of the year, I believe that these two stocks, which have performed so well, are positioned for gains.

Chart forGreen Mountain Coffee Roasters Inc. (<a href='https://seekingalpha.com/symbol/GMCR' title='Keurig Green Mountain Inc'>GMCR</a>)

Green Mountain Coffee Roasters has performed substantially well during the recent sell-off within the market. Over the last 3 months it has traded even but has lost 18% during the last month. The stock posted a gain of 1.38% on Thursday despite the market's loss, which shows its reaction to the price of coffee. GMCR is trading at $91, which is at the bottom of its range during the last 3 months. And because of its price and the rising commodity price of coffee, I believe that GMCR is very likely to exceed $100 during the next week, and potentially $110. The stock has been very volatile during this time period but has rarely dropped below $90. Since the market is trading more on technicals than fundamentals, I believe its range and trends are the safe way to play the stock until the market shows some consistency.

Chart forCoffee Holding Co.Inc. (<a href='https://seekingalpha.com/symbol/JVA' title='Coffee Holding Co., Inc'>JVA</a>)

Coffee Holding Company (JVA) has traded in a completely different way in comparison to GMCR over the last 3 months. It has lost 43% of its value during this period with large gains and losses along the way. Although it trades with the price of coffee, evident by its 9.14% gain on Thursday, it still occasionally trends with the market and is 133% more volatile. Yet over the last 5 days, the stock has gained 57% as it recovers a portion of its loss.

I believe there still remains a significant amount of room for this stock to grow, before it hits any level of resistance. The stock has reached a 52 week high of nearly $31, which is more than double its current price, and investors of this company believe the stock is worthy of its 52 week high price because of its financial progress over the last year. At $13, and with the price of coffee trading so low, I expect this stock to post very large gains over the next month and add to its 215% gain during the last year.

Although I expect both JVA and GMCR to post gains, each presents different levels of risk. I believe that GMCR presents more long-term risk as it now trades with a price-to-earnings of 89, meaning that any negativity or pessimism surrounding either the future price of coffee or the company could result in GMCR posting substantial loss.

However GMCR has consistently outperformed earning expectations, has a strong balance sheet, and is not expected to slow down anytime soon. Therefore, I believe that $91 presents a great purchase price with short-term upside of 20%; this would put the stock at the top of its 3 month range, which I don't expect to be broken until it announces earnings in 2 weeks.

I believe that Coffee Holding Company (JVA) presents a limited amount of risk compared to GMCR despite the size of the company. JVA trades with a price-to-earnings of 23.69 despite its 200% gain, which I believe is appropriate considering its level of growth. The company is growing similar to GMCR but obviously with less revenue and earnings. Yet I believe its potential to continue with a high level of growth over the next several years is quite high, especially since the company has $3.7 million in cash compared to $220,000 year-over-year giving it the ability to expand.

I believe that JVA could very easily top $16 by next week based on its large gains over the last week and investors' willingness to buy the stock during an uptrend. With the price of coffee at the bottom of its range and volume beginning to increase, I believe there is a strong likelihood of this goal being reached, with the only risk being the potential for excessive loss once it turns as this stock usually posts large gains or loss.

Overall I believe the upside is far greater than the downside for these two stocks. GMCR has definitely been more consistent yet JVA has posted the largest amount of short-term gains. It's impossible to know for sure how either of these two stocks will perform, but if you use any form of technicals, or psychology, when making an investment decision, then most would say that gains appear to be very possible.

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

Disclaimer: As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy.