Back when the coronavirus pandemic first capsized our economy, a combination of fear and lack of consistent, verifiable information had millions of Americans sheltering in place. One of the consequences was a complete (albeit temporary) lockdown of food-and-drinks establishments. Unsurprisingly, government data indicates that retail food sales spiked sharply early in the crisis, boding poorly for investments like coffee stocks.
With collective thoughts of The Andromeda Strain undoubtedly circulating across the country, being out and about with other strangers was not exactly atop the priority list for most folks. However, as acclimatization to the SARS-CoV-2 virus kicked in, so did bouts of cabin fever. Further, when various biotechnology firms began distributing Covid-19 vaccines, patience had worn thin: people wanted to get out, tilting the tide favorably for coffee stocks.
Better yet, the above narrative is neither conjecture nor an anecdotal observation. According to information from data analytics firm Placer.ai, foot traffic at some of the top coffeehouse chains enjoyed a notable uptick. Indeed, as 2021 drew to a close, November foot traffic saw an 8.4% increase compared to 2019 levels, while December experienced a 7.5% rise, suggesting good things to come for these coffee stocks.
While tech firms have suffered the worst of the volatility in the new year, most sectors have fallen prey to the red ink on Wall Street. Admittedly, coffee stocks are no exception, meaning that investors will still need to exercise caution despite the positive fundamental backdrop.
Coffee Stocks to Buy: Dutch Bros (BROS)
One of the eagerly anticipated initial public offerings of 2021, Dutch Bros is off to a solid start as a recently minted public company. At first, management anticipated a price range of $18 to $20 per share. However, BROS stock debuted at $23, eventually closing its first public session at $36.68. Since then, shares have been on a wildly choppy ride, though they never closed below this maiden milestone.
Moving forward, the company aims to expand its footprint, which is respectable. At the time of its IPO, Dutch Bros had over 420 locations in 11 states. Still, that puts the brand at a competitive disadvantage to its larger rivals. However, former CEO and co-founder Travis Boersma stated that the firm could nearly double its reach, adding as many as 400 new locations over the next three to five years.
Should the expansion happen, it will likely be met with a responsive audience. Unlike some other coffee stocks, Dutch Bros doesn’t take itself too seriously, presenting a fun, politics-free environment. As well, the company offers a variety of beverages that appeal to younger customers, allowing the firm to grow with its core base.
Plus, BROS has performed quite well recently, gaining almost 11% on a year-to-date basis.
Though mostly known for its hamburgers and especially French fries, McDonald’s is quite the player among coffee stocks. According to a 2018 Inc. article, the Golden Arches sells more than 500 million cups of coffee each year.
Of course, 2020 was likely the straw that broke the camel’s back. Over that particular 365-day period, revenue came in at $19.2 billion, the lowest tally since at least 2007. Even more worrying at the time, sales had been declining in years prior as millennials began gravitating toward healthier fare. However, preliminary results for 2021 indicate that the top line registered as $23.2 billion, a healthy reversal considering the circumstances.
Some of this could be explained from collective claustrophobia getting the best of people. As I mentioned in an interview with CGTN America, consumers are increasingly demanding a return to normal activities. And many are willing to pay a premium, a concept known as retail revenge.
What’s more, it’s possible that work-from-home experiment might not last indefinitely. Though it features advantages, some of the mechanisms to communicate with others is unideal. Sure, workers might not like the idea of returning to the office but ultimately, the employers sign the checks. That reality just might swing the needle for MCD and similar coffee stocks.
Coffee Stocks to Buy: Denny’s (DENN)
When nothing else is open, chances are, you can always rely on Denny’s for some quick-filling comfort food. In addition, the company is one of the top coffee stocks, though it doesn’t really have that reputation. Still, the numbers don’t lie. Back in 2013, Denny’s press release revealed that it sells nearly 90 million cups of joe each year.
Of course, that narrative changed rudely and dramatically when the Covid-19 pandemic hit. In one fell swoop, Denny’s went from consistently generating over $500 million in revenue to falling below $300 million in 2020. Now, on a trailing 12-month basis since the third quarter of 2021, the company’s top line is at $370.6 million. Still, that’s a far cry from pre-pandemic norms.
Unfortunately, the new normal has imposed a heavier weight on DENN compared to other coffee stocks. Since many locations no longer open for 24 hours, the company is losing a ton of business. Granted, it may not be able to justify the resumption of normal hours due to present circumstances.
However, if the Placer.ai is accurate, we could be looking at normalization eventually. That would bode well for DENN stock, potentially setting up a strong recovery.
While it’s the most popular name among coffee stocks, I decided to put Starbucks last on this list. The reason? SBUX stock has shown itself to be extremely risky at this time. On a YTD basis, shares are down more than 16%, which is exceptionally steep compared to its peers. Even more troubling, over the last five days, SBUX hasn’t been able to gain even 1% while the others on this list have posted a minimum of 3.5%.
That’s not going to inspire confidence anytime soon. Therefore, I’d like to see if SBUX will correct some more before taking a shot. And I do believe it will correct.
I’ve got to be blunt: SBUX is printing one ugly chart, not just for coffee stocks but compared to any other investment category. For one thing, the equity unit is conspicuously below both its 50- and 200-day moving averages, common barometers of nearer- and longer-term market health. But most problematic is the pensive trading following this year’s steep drop.
Still, if a massive correction occurs, investors should be ready. With each one of its plants producing 1.5 million pounds of coffee beans per week, Starbucks has the scale to fuel the world’s needs once we get back to a true normal.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.