How to Play the Coffee Stock Explosion - Coffee Holding Co (NASDAQ:JVA)

Saying it has been an amazing year-to-date for coffee stocks would be an understatement. Coffee Holding

JVA

, Caribou Coffee Company

CBOU

, Peet's Coffee & Tea

PEET

, Green Mountain Coffee Roasters, and Starbucks

SBUX

have combined for an average gain of 141.54% over the past six months – not a bad investment. An explanation for the explosion in price of these stocks is hard to pin down, as coffee futures (/KC) have only gained 15.3% in the same timeframe. Profits, however, need no explanation, as any portfolio holding these names has surely seen hefty returns. Coffee Holding has been the hottest stock in the sector over the past six months, gaining an astounding 416%. Currently trading at $20.85, shares have gained 163% over the past 20 trading sessions. The stock hit a 52-week high of $21.23 in Monday's action. Green Mountain Coffee Roasters has gained 169.7% over the past six months. Currently trading at $91.70, shares have gained 21.4% over the past 20 trading sessions. The stock hit a 52-week high of $92.97 in Monday's action. Peet's Coffee & Tea has gained 55.8% over the past six months. Currently trading at $60.59, shares have gained 19.7% over the past 20 trading sessions. The stock hit a 52-week high of $61.52 in Monday's action. Caribou Coffee Company has gained 38.6% over the past six months. Currently trading at $14.17, shares have gained 48.7% over the past 20 trading sessions. The stock hit a 52-week high of $14.49 in Monday's action. Starbucks has gained 27.6% over the past six months. Currently trading at $40.57, shares have gained 14% over the past 20 trading sessions. The stock hit a 52-week high of $41.11 in Monday's action.

ACTION ITEMS:

Bullish:

Investors who believe that coffee stocks still have more room to the upside might want to consider the following trades:

Given Coffee Holding's recent surge, investors may want to wait for a break above the 52-week high ($21.23) before entering this stock. A move above that price will provide confirmation that bulls are not done in this micro-cap just yet. Legging in (building a position in small increments) looks like the best way to go, as a short term correction seems likely.

Just like with Coffee Holding, investors may want to wait for Green Mountain Coffee to break above its 52-week high ($92.97) before entering.

For Peet's Coffee, it would be wise for investors to wait until the stock breaks above its 52 week high ($61.52) before jumping in. The 50-day simple moving average (one year daily chart) is 16% lower than the current trading price at $50.89.

For Caribou Coffee and Starbucks, just as in the other coffee stocks, waiting for share prices to break above their 52-week highs is a prudent idea. For Caribou, that price is $14.49 and for Starbucks that price is $41.11.

Bearish:

Investors who believe that these coffee stocks are due for a significant correction to the downside may consider these alternate positions:

Coffee Holding has undergone astronomical gains, and a significant correction to the downside is likely imminent at some point. Traders and money managers are constantly assessing risk versus reward in the market, and given this stock's (all of the coffee stocks for that matter) recent surge, the risk appears to be on the buy side. The trade is relatively simple, a short entry at the current price, with the stop out point at the 52-week high of $21.23.

For Green Mountain Coffee, bears might want to wait for a break below today's low of $91.38 before entering a short position, as the stock has shown some strength in the session. Upon entry of the short, the exit point would be the 52-week high of $92.97.

Peet's Coffee came within $0.03 of yesterday's high, but was quickly sold off, providing bearish investors with an excellent entry opportunity. A break below $60.18 would provide bearish confirmation.

For Starbucks, which is currently the weakest stock of the group (down 1.3% on the day), a short entry with a target price of $36.63 (50-day simple moving average on a one year daily chart) looks good. The stop out price would be the 52-week high of $41.11. The same trade works for Caribou Coffee, with the stop out being at $14.49 and the target being at $10.93 (50-day simple moving average) – 22% lower than the current price.

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