Market Overview

Caribou Carries Coffee Holding Higher

Caribou Carries Coffee Holding Higher

Shares of Coffee Holding (NASDAQ: JVA), a micro-cap maker and distributor of roasted and blended coffees, soared by 13.5 percent Monday on volume that is more than quadruple the daily average after private investment group Joh. A. Benckiser Group agreed to acquire Caribou Coffee (NASDAQ: CBOU) for $340 million.

As is often par for the course on Wall Street, an acquisition can spark speculation about what company in a particular sector is next to be acquired. That speculation often prompts jumps in the shares of the acquired company's rivals and that may be exactly what is happening with Coffee Holding today on the back of the Caribou news.

In this case, the speculation is not without merit. After all, the Joh. A. Benckiser Group has acquired three coffee assets this year. That does not mean Coffee Holding will be one of the investment group's future targets, but buying the rumor or speculation is an old Wall Street endeavor that will never die.

In the case of Coffee Holding, the stock is one of the highest beta names in the coffee sub-sector with a beta of almost 2.4. That is about twice the beta sported by Starbucks (NASDAQ: SBUX). Part of the reason why Coffee Holding's moves, particularly the ones to the upside, can be so exaggerated is the stock's massive short interest.

Nearly 18 percent of the company's shares outstanding are sold short and the stock's short ratio is 5.4, according to Finviz data. That means Coffee Holding shorts would need more than five days to cover their existing positions. No doubt the Caribou news has sparked a spate of short covering Coffee Holding today, adding fuel to the micro-cap coffee name's rally.

Beyond takeover chatter, Coffee Holding has some decent fundamentals such as five-year annual revenue growth of 28 percent, a modest debt-to-equity ratio and a current ratio of just 3.5. However, Coffee Holding is a momentum stock and the biggest potential stumbling block to that momentum is margin. As in the company's margins are not attractive. A gross margin of just 5.1 percent is not going to excite long-term investors.

Coffee Holding's brands include S&W Premium, Café Caribe, Café Supremo, Via Roma, Don Manuel, Fifth Avenue, and Entenmann's Coffee, some of which are well-known in the coffee industry. Not to mention, the stock is not too pricey at just 6.74 times forward earnings. So it is possible that a suitor may see an undervalued stock and the ability to boost Coffee Holding's margins via acquisition.

Plus, increased coffee group M&A activity this year has whittled down the number of legitimate takeover targets in the sub-sector. That could bode well for Coffee Holding in the near-term.

Posted-In: Long Ideas News Short Ideas Rumors Small Cap Analysis Small Cap M&A Intraday Update Best of Benzinga


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