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Is Starbucks Corporation the Best Way to Play America’s Love for Coffee?

Both Starbucks (SBUX) and Dunkin Brands (DNKN) are poised for growth

Starbucks Corporation (NASDAQ:SBUX) and Dunkin Brands Group Inc (NASDAQ:DNKN) are perhaps the most well known coffee stocks out there. And now DNKN and SBUX stock are back in the spotlight as the trend in U.S. coffee consumption has made a turnaround after four years of declines.

Is Starbucks Corporation the Best Way to Play America's Love for Coffee?
Source: Shutterstock

The change? In 2017, more Americans now drink at least one cup of coffee daily, according to the National Coffee Association USA (NCA) and younger consumers appear to be leading the charge with gourmet blends gaining in popularity.

This is good news for companies like Starbucks and Dunkin, which sell brewed coffee. This is especially true since their offerings match well with other demographic trends, such as the increasing demand for convenience. For example, the desirable millennial segment is the largest demographic visiting convenience stores today, according to Convenience Store News, an industry monitoring publication.

Although other names are sure to benefit from this trend, recently, several well-known coffee-seller chains went private following acquisitions, leaving DNKN and SBUX stock as the primary focus of those interested in coffee stocks.

Both companies did not reward investors very well over the past few years, but they seem ready to gain now.

SBUX Stock and “Upscale” Coffee

Starbucks built a reputation for a higher-end experience with local shops offering a bohemian atmosphere with comfy chairs and laid-back music. The dig is that Starbucks stores are everywhere and sometimes across the street from each other at busy city street intersections. They certainly have their share of space at airports.

However, that just tips us to the company’s aggressive expansion in China. According to the U.S. Department of Agriculture, coffee consumption in China has already tripled in the past four years. It is a good place for the company to expand, and perhaps a great growth prospect for Starbucks stock. It expects to open 5,000 locations by 2021 across that country.

The SBUX stock price did not fare well after peaking in early June and it fell 18% by mid-August. The bulk of that slide happened even before a disappointing Q3 earning report in late July.

However, since then, the stock stabilized and several technical indicators, including money flows and the 50-day moving average, actually turned higher. Indeed, 81 analysts queried by Estimize expect the company to report Q4 earnings of 57-cents-per-share vs. the general consensus of 55-cents-per-share. If it happens, it would be a positive surprise for the street and a potential booster for Starbucks stock.

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Technical resistance is at the top of its trading range at $56.25. Should SBUX stock close above that level, it would change the tone of trading and suggest a quick move back up to its pre-earnings level at $59.50.

Beyond that, it would not take much in terms of good news to send the stock back to the top of its long-term trading range near $64.

But for those who are looking for a distinct alternative to Starbucks stock, DNKN stock offers some nice opportunities as well.

Coffee Stocks: Is DNKN Another Solid Option?

Dunkin Brands has more of an “every man” reputation with stores catering to a quick in and out experience. Tables are not fancy. However, unlike SBUX, where customers have to add their own milk and sugar, Dunkin hands you a ready-to-drink beverage to speed you on your way.

With its “America Runs on Dunkin’” advertising campaign, Dunkin’ Donuts is selling the idea that coffee is fuel, according to Fast Company Magazine. Indeed, that may be the impetus behind the company’s possible plan to drop the word “donuts” from its store name. Dunkin Brands is the parent company to Dunkin Donuts.

DNKN also does well with the younger crowd. In a survey by Piper Jaffrey, it was rated as a favorite restaurant chain with teens.

Dunkin Brands chart
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As with SBUX, DNKN stock also peaked in early June, but it slid only about 14% into its August low. However, the stock has already regained more than half of what it lost. And 24 analysts queried by Estimize expect the company to report Q3 earnings of 65-cents-per share vs. the general consensus of 63-cents-per-share.

If that happens, it would be another positive surprise for the street.

Technically, money flows, as indicated by the on-balance volume study, are strong. They even gained as prices declined over the summer, so demand for Dunkin shares did not waver.

Therefore, as long as the broad market does not suffer a major correction, the outlook for further gains in DNKN stock remains good. New highs would not be a surprise.

As of this writing, Neil Martin did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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