Are Shares of Coffee Retailers Overheated?
Are stocks like Starbucks and Caribou Coffee investable at current prices? What is their near- to mid-term outlook? To find these answers, turn to their charts.
After standing toe to toe with the financial crisis and absorbing multiple economic body blows, retailers 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. 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' is 23.
Turning to Green Mountain Coffee Roasters and forward revenue and earnings growth clocks in at 60-70%, although that should slow measurably by 2013. Green Mountain'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.
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 blow-off 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% 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.
Editor's Note: Andrew Nyquist is an independent investor based in the Minneapolis area. This article originally appeared on his investing and economics site, See It Market. His writings also appear on Minyanville's blog community.
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