Coffee always has been a great investment its an addictive product with global
consumption. But are the days of multi-baggers in coffee stocks over? Yes.
Overall, coffee stocks are flying way too high on a caffeine buzz right now.
Does that mean you should sell them? Yes. All of them? The answer depends on
which of the four big public players you hold. Heres a look at how to play these
four fresh-roasting stocks: Green Mountain Coffee Roasters Green Mountain Coffee
Roasters (NASDAQ: GMCR ) has been the multi-bagger poster child for the sector.
The stock is up 27-fold in the past five years. The company has been growing
earnings like gangbusters, but about a year ago the SEC started an informal
inquiry into the company. On Monday, hedge fund manager David Einhorn made a
negative presentation in New York in which he attacked Green Mountains poor
transparency and shifting financial disclosures, and claimed that capital
spending is growing much faster than the business. Investors ignore Einhorn at
their own peril. He, along with hedge fund manager Bill Ackman, called the 2008
housing crisis and made a fortune shorting companies like Lehman Brothers.
Einhorn is right about free cash flow. GMCRs has been flat over the past nine
months, negative over the trailing 12 months, and negative all the way back to
at least 2008. Thats not necessarily unusual for a high-growth stock, but with
GMCR trading at 51 times this years earnings, buying in at this level seems like
a mistake. Shorting Green Mountain would make more sense, but with a momentum
stock, you better have a stop-loss in place. If you hold GMCR, Id sell.
Starbucks Im more optimistic about Starbucks (NASDAQ: SBUX ). After stumbling
the past few years because of a combination of vast overexpansion and the tough
economy, Howard Schultz returned to the CEO seat. SBUX has its second wind and
has begun growing earnings again 20% is expected this year and next, and 16%
over the next five years, annualized. Starbucks remains the go-to choice in much
of the country and has earned acceptance globally. I think the key to the
companys long-term success is continued innovation. In the meantime, with $1.5
billion of net cash, and $929 million in trailing 12-month free cash flow
(TTMFCF), Starbucks sits on solid ground financially. The only problem right now
is its price. At $41, SBUX is trading at 27 times earnings. If you hold
Starbucks, I might take some profits and look to re-enter at lower prices. I
wouldnt pay more than $30 at this point. I wouldnt short SBUX since it isnt
outrageously overvalued.
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