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

Three coffee stocks to play the down economy


Starbucks coffee stocks

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 Peet’s 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

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:


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. Caribou’s 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.

Article printed from InvestorPlace Media,

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