Coffee Stocks and Your Investments: More Than Starbucks

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Look, everyone's going nuts about Starbucks (NASDAQ: SBUX) right now. The chain is growing, it just announced great earnings and the world is a twitter about the company. Good for them.

But what's the whole coffee hype about, anyway. My wife, for example, worships Starbucks, even though she doesn't drink coffee. She's willing to drive 30+ miles from our South Carolina home on weekend mornings to get a cup or hot chocolate or chai. But never coffee. So what's going on here?

Starbucks has dominated the scene because it creates a 'scene.' It's a place to be and exist. Many people just seem to like the ambiance and setting and Starbucks knows how to play off of that. So it's not about the coffee, right? Or maybe it is, people certainly pay for the coffee, sometimes a lot. Sometimes even $7 for a single cup of coffee.

So there's something there for coffee, and with the recent news I thought I'd look at some of the firms that sell it. You might be surprised at who I think is worth investing in for the coffee angle.

Starbucks

Starbucks is the 800-pound gorilla in the room. The company's market cap is $42 billion and the chain is so ubiquitous and so associated with coffee that jokes about the brew center on the place in television and movies. The funny thing is, even though the firm is so popular, so media-friendly, here in the United States, the real growth in the firm is overseas. It's been going gangbusters in China and other parts of the Pacific Rim. The firm has opened hundreds, perhaps thousands of shops in China alone, much less the other East Asian countries. If that keeps up there's no telling how far coffee and danishes can take it. The company’s stock has been largely flat, though. Curiously so. It has a high P/E at 30.59 for a firm that's not having its price driven up. The dividend did get raised from 17 cents per share to 21, though. That's still a moderate 1.48% yield, so that's nice but it won't drive investment. All that tells me that Starbucks value is already locked into the share price and something else, something not short-term, will be required to really boost it again.

Dunkin Donuts (NASDAQ: DNKN)

No one ever believes me about this, but the popular donut shop is a sleeper when it comes to coffee investments. Not that people don't know about it. It's not a hidden gem. But people, despite the company's attempts to promote coffee, just don't think about the firm that way. They should. The company is aggressively expanding into new markets and products and very much wants to become the prime stop for commuters looking for a bite and drink on their way to work. Currently trading at $36.70, Argus just set a price target of $42 for the growing firm. This is in addition to the 20% or so share growth the firm has seen in the last 12 months. And there's a dividend similar to Starbucks with a yield of 1.63%

Tim Hortons USA (NYSE: THI)

The U.S. branch of the popular Canadian chain has had a strange run this last year. It's amazing how a stock so associated with Hockey can still make inroads in the U.S. Still, I like what they do and they do it well. Not quite as much of a gathering place as Starbucks tries to be, the chain still provides a cozy, friendly atmosphere for meeting with friends, though I don't see it becoming haven for laptop wielding social media experts anytime soon. The stock has been on the roller coaster this year, as high as $58.47 and as low as $45.41. Still, it's done well over the last two or three months and I think there's some value there. A dividend, again only yielding about 1.69% just adds to the excitement, I guess.

McDonald’s (NYSE: MCD)

This is another one that people just don't believe me about. McDonald's is committing to become a coffee provider. The firm is even going so far as to begin selling bags of its coffee roast in Canada. I think if it works there, it's only a matter of time before those bags are sold in U.S. grocers and maybe even in the restaurants themselves. McDonald's is, of course, a monstrously large firm but a move into the coffee business is a brand extension that makes sense. Look for more marketing behind the firm's coffee in the next few years as it tries to build some sense of product quality before its blends. The stock had a bad first half of 2012, dropping to a low of $83.31. But it's climbed back up to $93.86 in the last two months and I believe it'll keep doing well. Finally, there's also a 3.28% dividend yield. That's a strong difference you should note.

Coffee is, like any relatively expensive luxury, a variable stock asset. What works in one economic climate might not work so well when things change. But I think America's coffee habit is pretty well-established and it would take a lot to get people to stop having their morning eye opening cup. The real question becomes whether it'll come at a fancy and more expensive shop, or whether firms can wrestle customers away from Starbucks with a more downscale price and presentation.

Good luck!

Follow Nate on Twitter: @natewooley

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Nate Wooley has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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