Time To Sell These Stocks!
Remember that coffee article I wrote a few months ago?
In late November 2012, I suggested investors would be well served by making bullish trades in Starbucks (SBUX), Dunkin’ Brands (DNKN), and Caribou Coffee (CBOU).
My thesis revolved around the fact that coffee prices were cheap and getting cheaper. Thanks to dwindling bean prices, coffee companies were percolating better margins… and would likely see their share price soar.
Turns out that idea was right on the money…
As you can see, bulls are having their way with Starbucks. The purveyor of fine coffee is up 27% from the $46 it traded in late November 2012.
But now’s not the time to be buying…
Shares are just 4% shy of the all-time high set in April 2012 (blue line). What’s more, Starbucks is trading at a lofty 22x forward earnings. As a result, it’s unlikely shares will zoom past all-time highs in the near future.
And what about Starbucks’ competition?
Well, Dunkin’ is making a bullish run of its own.
The Canton, Massachusetts based vendor of coffee and delicious donuts is up 15% from its late November 2012 price of $31.50.
But much like Starbucks, Dunkin now has an expensive valuation. With shares trading at 11x book value (well above the industry average of 6x book) investors will likely slow their purchases soon.
And last but certainly not least…
The third stock, Caribou Coffee, was taken private in a $324.8 million buyout late last year. Caribou shares shot from $12 to $16 once the deal was finalized in December- a 33% return in a matter of weeks!
No doubt about it, Starbucks, Dunkin, and Caribou gave investors solid gains over the past few months.
But now you should sell these stocks…
Not only are Starbucks and Dunkin looking overvalued, but there’s a fundamental change brewing in the coffee market. You see, even though global coffee supplies are abundant and prices are cheap, there’s an interesting situation shaping up- one that could give a positive jolt to coffee prices.
Let me explain…
An outbreak of Roya fungus, also known as leaf rust, is affecting half of the coffee plantations in El Salvador. What’s more, the outbreak is hampering coffee production in Honduras, Nicaragua, and Guatemala.
While there’s no immediate supply threat from the leaf rust outbreak, there’s still a very good chance coffee’s downtrend comes to an end soon.
Take a look…
As you can see, coffee has trended steadily lower over the past six months. In mid-February, the price dropped to $1.38 a pound, a level not seen since June 2010.
Prices are so low because the global coffee market is currently well supplied. In fact, a record off-season crop from Brazil has had professionals short coffee futures for months now.
But considering how far coffee’s already fallen and the looming effects of the leaf rust outbreak, odds of continued downside are starting to wane.
Bottom line…
Starbucks and Dunkin’ have had great runs. But with coffee prices setting up for a move higher, now’s the time to be a seller of these stocks!
Until Next Time,
Justin Bennett
Category: Commodities
