One More Cup of Coffee for The Road


This lesson looks at how to take advantage of a micro sector boom.

First, As a multi currency subscriber, you receive a reduced fee for our upcoming July 24-26 International business and investing seminar.  The normal fee is $749. You pay only $500.  You save $249. More details are at the end of this lesson. July 24-26 IBEZ North Carolina

Now onto the lesson:

The last lesson looked at the importance of having multi currency discipline when investing.

Yet how can we easily become more disciplined?

One way to create self discipline is to invest in what we know and love.   My pet phrase for decades has been… Turn Your Passion into Profit.

When one becomes involved in things that are of interest, discipline comes more naturally.

For example… I should have seen this micro sector boom investment opportunity coming, because…

I love coffee.

Ecuador-coffee

Here I am with Merri at our Cotacachi hotel, working in the courtyard… with our coffee.

Sometimes… really simple, in our face things…. can give us investing clues.  Warren Buffet for example made fortunes from shaving, ice cream and Coca Cola.

The Coffee Micro sector has been caffeine fueled!

A recent USA Today article by by Matt Krantz entitled Coffee stocks are piping hot these days shows why simple ideas… that create micro sector booms… combined with value… create opportunity.

Here are excerpts from this  article:

Looks like coffee is starting to perk up on Wall Street.

While the broad market is struggling to hold its recent gains, shares of five of the largest publicly traded coffee companies are on a high boil.

Shares of Diedrich Coffee (DDRX) are up 4,525% this year, Green Mountain (GMCR) has doubled and even Starbucks (SBUX) is up 50%.

That shows that investors think consumers, despite the recession, still crave their coffee fix, though they’re looking for ways to spend less, says Michael Podhorzer of research firm Sidoti. “Coffee is recession-resistant,” he says. “Whether they go out for it or go to a grocery story, people will still buy their coffee.”

Behind the coffee stock boom:

• Do-it-yourself. Green Mountain is at the center of the make-your-own trend, as it makes popular single-serve coffeemakers under the Keurig brand name. Consumers drop a small coffee-filled pod in a machine, and coffee flows into a cup.

• Cost control and better store traffic. Starbucks rose 3.3% to $14.16 Tuesday after Robert W. Baird analyst David Tarantino upgraded it to outperform, saying advertising helped boost coffeehouse visits. And a close eye on cutting costs improved profit upside for Starbucks, says Cowen analyst Colin Guheen.

• Low share prices. It didn’t take much confidence to make investors willing to take a shot on the stocks, because they were priced for disaster. Diedrich and Caribou Coffee (CBOU), for instance, started this year at less than $1.50 a share.

This does not mean that you should rush out and buy coffee shares now. The article also goes on to say:

Some fear investors are in a caffeine-induced frenzy. Podhorzer is neutral on Peet’s Coffee & Tea, (PEET) saying, “We don’t really see any big problems, but we think it’s fairly to slightly overvalued.”

ecuador-coffee

I like coffee so much I bring back Intag organic coffee from Ecuador to enjoy when we are at our farm  in North Carolina.

We’ll see in a moment why Peet’s shares may be poor value, but the point is not that we should invest in coffee shares… or coffee at all. The shares mentioned above may or may not offer good value.

The lesson here is that we can look around our home, our office or place of work. We can assimilate what we see in our travels… what we do each day… what we are involved in.  This observation can give us obvious clues.

We do not have to invest in rocket science to make money either.   Often the big money is in the mundane.

For example, this weekend I visited a friend who owns a greenhouse flower/vegetable business here in North Carolina. She explained how this year they cut back on their flower production and dramatically increased the vegetables they sold.

The clue here is investing in items related to gardening and reducing the cost of living.

The Family Dollar Store share price, (NYSE: FDO) for example, skyrocketed last year.  Cheap shopping seemed to be the thing that Americans were going to do.  Here is a chart of the FDO shares for the past 18 months starting January 2008.

From the low in January 2008 to the high in April 2009, shares rose almost 50%… in US dollars. (more on that in a moment).

share-price

Then again the chart below of the same share price during the most recent quarter shows why it is not always a good idea to jump on band wagons that are already up to speed!

FDO share price April-May-June 2009.

share-price These shares may or may not be good value, but a lot of the short term up tick potential is gone.

We need to spot ideas about things that we know… that make sense from our perspective… before they become a hot trend in the market place.

Then, if we get lucky, the trend will catch on.  If we are not lucky… but have invested in value… the shares will rise anyway… but in a longer term.

Let’s go back to the coffee mania because many coffee shares may be caffeine charged, but too much caffeine makes the hands jittery and… perhaps… makes share prices shaky as well.

Lets use this micro sector boomlet to see what to do to take advantage of micro sector booms.

Keep in mind the way these micro sector spurts work.

First, one coffee share takes off.  Maybe the share is  a good one.  Maybe not.

Then, the second and maybe a third share takes off.  Then even bad value coffee company shares begin to rise.

Let’s use Peet’s (the coffee & tea company) to get an idea of how one can think these micro sector booms through.

The first valuations of a share’s value  always relate to management skill and experience,  market share, PE ratios… price to cash flow… return on dividend and yield, business plan and future of the market, etc.

Then look at the history of the share price.  Peet’s shares, despite the caffeine boom are in a longer term on a down trend… even though it was bucked up by the coffee boom.  Here is a two year chart of Peet’s price.

coffee-share-price

Then look at volatility.  Here we see a bit of a roller coaster.

Next look at the currency in which the  share is denominated.   Peet’s of course is a US dollar denominated share.  A look at an 18 month dollar euro  chart shows that if you jumped in March 2009 exactly when the Peet’s price was starting its most recent climb you lost a third of the profit, in euro terms, due to the US dollar’s fall.

The Peet’s share price went from $20 to $27, a 35% jump.

However the greenback tumbled from $1.25 per euro to $1.40 per euro, about a 12% loss, in the same period.

US dollar versus euro January 2008 – June 2009.

dollar-euro

Next look at the currency stability factor of the share.

All the coffee companies have a fairly high currency stability risk because the expense of their main commodity is a big part of their cost in relationship to overall income.   The cost of silicon is low in relationship to the cost of a computer, etc.   The cost of coffee in relation to the price of a cup of coffee is high.

Coffee companies sell a refined commodity… ie coffee.   In times of inflation, their main ingredient cost is likely to rise enough to have a direct bearing on the sales price of the product.

Next look at sales. If a company is doing business around the world, it has greater commodity stability. The income is in dollars, yen, sterling, euro etc.

Starbucks for example has about 12,000 stores, almost 4,000 of which are in 36 countries outside the U.S.    US consumers drink only about  20% of the world’s coffee.   Starbucks aggressively sells its offerings in countries that already have dedicated coffee or tea drinkers and international revenues have been jumping  over 30% a year.   Nearly 30% of total company revenues now originate outside America, up sharply from only 9% in 1997.

Peet’s Coffee & Tea Inc. (PEET) on the other hand expands mainly in the US by using targeted advertising, such as direct mail and email.  Peet’s has multiple channels to sell its products, including retail stores; home delivery; food services; office; and grocery stores. Peet’s coffee is currently sold in over 3,500 grocery stores… leaving it much more vulnerable to a drop in the buck.

Peet’s has some good points.  Sales rose by 14% in 2008.  Corporate executives agreed to a management salary freeze for 2009, while increasing salaries for hourly workers.  Starbucks’ heavily reliance on expanding stores to increase sales, requires more capital and risk than Peet’s approach to grow at a more measured pace and focus more on grocery store alliances to sell coffee beans.

Peet’s strategy paid off in the down turn, but is this the most dynamic approach wen the recovery comes.

Peet’s share price has risen 35% on sales growth of 14% and lower profits.  This does not make sense from a value point of view.

There are many factors to judge when trying to find value either in a likely trend (that has not happened) or in a micro sector boom like coffee.

The two factors that make consistent success in this investing process more likely are sticking to what you know and always looking… hard…  for signs of good value.

Gary

Join us July 24-26 in the Blue Ridge and save $249.

As a multi currency subscriber, you receive a reduced fee for our upcoming July 24-26 International Business and Investing Seminar.  The normal fee is $749. You pay only $500.  You save $249. More details are at the end of this lesson.

Merri and I love our life in the Blue Ridge… the rushing streams and…

ecuador-banks

the spring flowers peeking into our kitchen.

ecuador-banks

We love our life in Florida here is a view from one of the houses on our recent house buying trip there.

ecuador-banks

Plus we’ll look at investing and living in the Andes. here we are with our Andean family at our hotel Meson de las Flores.

ecuador-banks

and the majestic mountain views from our condo there.

ecuador-banks

We also look at Ecuador beach investing.

ecuador-banks

We review tax and asset protection benefits from global business and investing as well.

We hope you’ll share our beautiful lifestyle in the cool Blue Ridge with us this summer. July 24-26 IBEZ North Carolina

As a multi currency subscriber, you receive a reduced fee for our upcoming July 24-26 International business and investing seminar.  The normal fee is $749. You pay only $500.  You save $249.


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