The Stock: Caribou Coffee Company, Inc.
Recent price: $8.94 (U.S.)
Trend: The market correction has left a bitter aftertaste as investors struggle to read the market tea leaves, but coffee stocks seem to be offering a more calming brew as we head into the summer months. Despite some near-term supply concerns in specific producer regions, international coffee bean prices have been slipping in 2010, evident in the downward trend of the iPath Dow Jones-UBS Coffee Subindex Total Return exchange traded note , which reflects potential returns on unleveraged investments in coffee futures.
Consumers can be forgiven for feeling somewhat surprised by that trend, since both Kraft Foods Inc. and J.M. Smucker Company hiked the price of some of their coffee brands in May and Second Cup Income Fund more recently raised its prices for some coffee products. However, the underlying weakness in the commodity price trend and an improving economy - giving leeway to pass on price increases to customers - make for a favourable environment for coffee vendors.
More indicative of the current attractive fundamentals of the coffee business is the performance of the stocks of downstream coffee purveyors. The shares of Green Mountain Coffee Roasters Inc. , a specialty coffee growth story, have notably retreated since the company's recent acquisition of Diedrich Coffee Inc., but the stocks of smaller regional distributors in the group like Peet's Coffee & Tea Inc. sport bullish trend indicators. Wholesale coffee roaster and dealer Coffee Holding Company Inc. also continues to hold up in the face of a broad stock market retreat, its lightly traded stock still outperforming the S&P 500 by 8 per cent in the past three months despite recent weakness.
The bullish trend of the industry gets its biggest profile from the leading coffee retailers. Starbucks Corp. has been a stellar performer for over a year, rewarding investors devoted to this iconic brand as it has returned to profitability and prepares to ramp up a secondary retail presence with its less upscale Seattle's Best iteration. Canadian investors partial to our own cultural coffee icon, Tim Hortons Inc. , are happy with its performance through the market turmoil, too. Its stock remains in a solid bullish trend. The relative strength of stocks in the coffee retailing group presents an attractive investment play as the market sorts through significant macroeconomic issues.
The Trade: The stock of Caribou Coffee Company Inc. rallied in April and is a recent Stock Trends Bullish Crossover, signifying a trend-following trade entry opportunity. Trading volume in the shares of this eco-friendly, socially responsible gourmet coffeehouse operator - the second largest in the United States - surged at the end of May as the stock climbed to a new 52-week high. The stock's original breakout in the second quarter of 2009 was a spectacular move from under $2 to a high of $9.38 six months later. That bullish trend faltered through the first quarter of this year, as the stock was categorized as Stock Trends Bearish. The recent buy signal marks a return to its long-term bullish trend.
The Upside: Although the stock has pulled back since extending above $10, a return above the $9.50 level should invite additional price momentum. The stock is currently still up over 30 per cent in a rally that has been fuelled in the midst of considerable stock market uncertainty. Considering that Starbucks now presents itself as a comfortable dividend-paying stock, Caribou Coffee could continue to generate more buying interest from growth oriented investors attracted to the sector. New highs for the stock above $10 should again be on order if the consumer sector strength holds and coffee bean prices remain stable.
The Downside: The drop below $9.30 this week to a low near $8.50 already puts this trade at risk as the stock now sits below a price support level. Current trend line support should allow for more short-term weakness, however a slip to below $8 tells us that this cup of java has gone bad.
- Barclays Bank iPath Bloomberg Coffee Subindex Total Return $18.34+0.22(+1.21%)
- J M Smucker Co$128.38+0.23(+0.18%)
- Coffee Holding Co Inc$3.60-0.12(-3.23%)
- Starbucks Corp$56.25-0.14(-0.25%)
- Updated May 5 3:59 PM -4GMT. Delayed by at least 15 minutes.