Make Money on the 21st Century Soup Kitchen: Coffee Shops

The weight of last week's jobs report was simply crushing. We learned that
exactly zero jobs were created in August. Fears of a double-dip recession are
fast becoming a reality. There are three stocks to buy in this environment:
Starbucks (NASDAQ: SBUX ), Caribou Coffee (NASDAQ: CBOU ) and Peets Coffee & Tea
(NASDAQ: PEET ). The reasons for these buys might surprise you. First, the big
picture: The U.S. is experiencing a traumatic economic event, characterized by
persistently high unemployment and persistently high uncertainty. What began in
2008 with the collapse of the housing market and financial crisis has yet to
reach its full course. This is not the Great Depression, mind you. There are no
shortages of food or Hoovervilles prompted by a homelessness epidemic. But the
pain of losing jobs, abandoning homes and enduring pay reductions is very real
in its own way. From both a sociological and investing perspective, I am
fascinated by the rise of "the new soup kitchen." Namely, the coffee shop.
The number of unemployed and those now scrounging for work are opting for a new
community hangout. For those that lived during the Great Depression, the soup
kitchen was more than just a place to get food. The coffee shop is serving the
same purpose in the "Great Recession." It is a place to network and it often
has free internet access to search for new opportunities. Instead of eating soup
and trading handbills, the nation's unemployed are sipping lattes and surfing
Monster.com. Perhaps that explains why coffee stocks are doing so well in this
market. My expectation is that they will continue to do well. Here's a look at
three coffee shop stocks to buy: Starbucks The king of the coffee shop movement
is Starbucks. After overly aggressive expansion and a lack of focus that hurt
shares, the company has rebounded nicely in the past 18 months. For the year,
shares are up 21%, including a slight pull-back during this recent correction.
The company is one of the best performers in the market, and that trend is
likely to continue. Analysts expect Starbucks to make a profit of $1.52 per
share this year, growing 20% to $1.82 in the following year. Investors need to
pay a premium of 25 times this year's expected earnings, but the price is well
worth it. Caribou Coffee In comparison to Starbucks, Caribou Coffee is but a
blip on the radar screen in the coffee shop business. That said, the company is
well established in its various markets, and its stores are doing brisk
business. Like Starbucks, shares of Caribou are doing very well in 2011. The
stock is up 41% year to date. That impressive performance has been fueled by
growth in operating profits. The company has beaten analyst estimates in each of
the last 2 quarters and shows no sign of slowing. Wall Street expects profits to
grow by an impressive 24% from the current year to 2012. Shares trade for a
premium valuation of 35 times earnings as investors rush to stocks that are
working in this environment. Caribous future prospects are compelling, so that
P/E ratio might not be a sign of disaster. With its core business stabilized,
look for the company to go frontal in its competition with Starbucks and grow
substantially. Peet's Coffee & Tea In addition to selling its product through
company owned stores, Peet's Coffee & Tea distributes its product via a number
of established channels including grocery stores, home delivery, office accounts
and restaurants. Shares are up 37% so far in 2011. As unemployment rates
remained stubbornly high, Peet's has generated profits over the past two
quarters that have easily exceeded Wall Street estimates. That trend will
continue the longer people stay out of work. For the current year the company is
expected to make a profit of $1.50 per share growing 23% to $1.84 per share in
2012. Shares trade for a hefty premium of 38 times current-year estimates. Like
Caribou that premium is likely based on the growth potential of Peet's to
expand its retail presence. I would buy this stock as more workers tire of
searching for work in the comfort of home and head to the coffee shop instead.