Is the market heading to its fourth bubble in the last 10 years? It's something that investors don't like to face. After all, a market bubble feels so good on the way up - but wasn't the hangover associated with the end of the technology, real estate and commodity bubbles enough to teach the market a lesson? Apparently not. In fact, we seem to be witnessing the start of such an event in coffee stocks.
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What's Brewing?
Green Mountain Coffee Roasters Inc. (NYSE:GMCR) has been on a tear over the last year, rising from a 52-week low of $15.34 to a close on August 4, 2009, of $66.76. It now trades at 38 times forward 2010 earnings estimates of $1.77.
So what's powering this move up? The success of a single-cup, brew-at-home coffee maker called Keurig, which has seen sales skyrocketing during the last year, and is the newest trendy thing to hit the U.S. This has given strong earnings momentum to Green Mountain Coffee Roasters, which has seen its estimates for 2010 move up 24 cents over the last 90 days.
The problem, of course, is that the single-cup brewing system not a new gadget; I have owned one for more than two years. And growth always disappoints in the end, as expectations for it are bid up to unsustainable levels.
Wasn't it just last year that investors hated Starbucks (NYSE:SBUX) and Caribou Coffee Company (Nasdaq:CBOU) because no one was willing to pay $2 for coffee in a recession? So is it logical to conclude that once the recession ends, these coffee brewers will find their way to the bottom of the pantry, along with the bread maker and ice cream makers?
Green Mountain Coffee Roasters is not the only coffee-related stock to explode recently. Take a glance at a chart of Diedrich Coffee Inc (SMCAP:DDRX) and you might assume the stock has undergone a reverse split. For years, the company plodded along, unknown to most investors, falling from a stock price in the high single digits in 2005 to its 21 cent low in March 2009.
And then it rose spectacularly from the nadir of its brief existence to close at $25.39 on August 4, 2009. That's an 11,190% gain.
For those fundamentalists in the room, Diedrich Coffee has reported three straight years of operating losses.
The Coffee Crusade
I can see pundits and analysts defending the nascent bubble already, saying something like "just think if people in China drank as much Coffee as Americans." And then someone jumps up in the back of the room and yells "peak Coffee is upon us" before he is dragged away by security, lest he panic the crowd.
Although I am being somewhat polemical to compare the strong performance of coffee stocks to previous investor bubble insanity, it's important to remember that these things always start off slowly and innocently before leaving investors a lot poorer in the end. (Read Squeeze A Greenback Out Of Your Latte to see how you can save on coffee costs.)
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