Too Hot to Handle: Are Shares of Coffee Retailers Overheated?

By Andrew Nyquist
After standing toe to toe with the financial crisis and absorbing multiple economic body blows, retailers (and coffee stocks) like Starbucks (SBUX), Green Mountain Coffee Roasters (GMCR), and Caribou Coffee (CBOU) stand as strong examples of just how valuable coffee is to the American consumer.  Tighter budget or not, coffee is clearly an important part of the morning routine.  Simply put, Americans love that fresh roasted smell and taste and can’t give up their morning caffeine kick!  In fact, Americans are digging it now more than ever… even at a cost of $3, $4, or $5 per cup.

At the height of the financial crisis, consumer related stocks were getting pummeled.  And coffee retailers, um, well, who needed them?  The outlook was grim, at best.  Caribou Coffee’s stock had dropped down to a buck and change and Starbucks sat around 7 to 8 dollars.  But those prices are now just a distant memory, as the industry has climbed the proverbial wall of worry over the past two years.

Fast-forward to today, and Caribou’s stock is over $14 and Starbucks over $42.  In fact, both stocks hit all-time highs earlier this year.  Revenue growth has been chugging in at about 10% and profits are growing nicely; Caribou’s forward Price/Earnings (P/E) is 28 and Starbucks 23.  Turning to Green Mountain Coffee Roasters and forward revenue and earnings growth clocks in at 60-70 percent, although that should slow measurably by 2013.  GMCR’s forward P/E stands at 27.

This all sounds good, but an all-important question still remains:  Are these stocks investable at current prices?  And further, what is the outlook for these stocks over the near to mid term?  To find answers to these and more, we need to turn to the charts and put the stocks through some technical analysis 101.

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Starting with Starbucks, the charts show a strong, developed bullish channel that should assist in guiding investment decisions – any sustained break of the lower channel could spell trouble.  Caribou looks to be consolidating/absorbing a blowoff top formation from a few months back and needs some time to heal.  And lastly, Green Mountain Coffee Roasters is trying to find a bottom after free falling 50 percent on negative valuation comments from acclaimed value investor David Einhorn during his presentation at the Value Investing Congress.  See annotated charts below for additional color.


Have a great week.  And happy investing.


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No positions in any of the securities mentioned at time of publication.

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of his employer or any other person or entity.