As Starbucks (SBUX) Stumbles, Green Mountain Coffee Roasters (GMCR) Shines

April 16, 2009

As an investor and businessman, I'm always amazed at how quickly the business landscape can change. What's working one quarter can suddenly become outmoded the next. That's why investors need to watch the stocks in their portfolios carefully. In an instant, an innovative company can morph into a dinosaur.

Case in point: Starbucks (SBUX).

For years, Starbucks was the darling of Wall Street. It seemed to do no wrong. The shares vaulted from less than 70 cents a piece in 1992 to $40 by 2006. But below the surface, the company was having a big problem that I see all too often. Starbucks wasn't managing its growth very well. The company simply opened too many stores far too quickly.

I could see trouble was coming. Everywhere you turned, you saw a new Starbucks. Many stores were only a few hundred yards from each other. The trouble finally caught up to the company, and last summer, Starbucks announced that it was closing 600 stores.

Starbucks Earnings Report -- Don't Expect Good News

That still wasn't enough. In January, Starbucks announced another 300 store closings. In early March, shares of Starbucks got down to $8. Earnings are due out on April 29, and it won't be a good report. The Street is expecting 15 cents a share, which is a big drop from the 18 cents a share from last year. And it might be even worse. Starbucks has missed its earnings for the last three quarters.

Don't be fooled by the low price. I currently rate Starbucks a Hold which means, if you own, there's no reason to sell at this price. But if you don't own, this is not the time to buy Starbucks.

What Starbucks Used to Be

So what happened to Starbucks? I think they just got too big and lost their entrepreneurial spirit.

Fortunately, I was very pleased recently to see a small coffee outfit that reminds me a lot of a young Starbucks. Like my 5 Best Stocks to Buy Now, this company is perfectly-positioned to take advantage of the current economic climate.

As their name suggests, Green Mountain Coffee Roasters (GMCR) is based in the bucolic state of Vermont. The company offers about 180 varieties of coffee, cocoa and tea, which it sells to wholesale customers including supermarkets, convenience stores, resorts and office-delivery services.

Some of its biggest customers are ExxonMobil's convenience stores and McDonald's restaurants. Green Mountain coffee is also sold under the Newman's Own Organics brand, as well as its namesake, Green Mountain Coffee label. The company also sells the Keurig single-cup brewing systems for office and home use. In September, Green Mountain acquired Tully's Coffee, which has been chipping away at Starbucks dominance in the Pacific Northwest.

As Starbucks stumbles, smaller competitors like Green Mountain are picking up market share. Instead of grabbing a $5 Starbucks latte on the way to work, java heads are simply drinking coffee via the company's Keurig single-cup brewing system.

In its latest quarter, GMCR's sales rose 55.9% to $197 million, compared with $126.4 million in the same quarter a year ago, thanks to strong sales of its Keurig brewing system. Specifically, Green Mountain saw a 55% rise in its shipments of K-cup portion packs, while sales of Keurig brewers rose by 121%. Green Mountain's operating earnings rose to 16 cents per share, compared with analysts' estimate of 13 cents per share. That's a 23.1% earnings surprise!

Looking forward, the company raised its fiscal 2009 guidance to $1.25 to $1.35 per share, up from its prior estimate of $1.20 to $1.30 per share. Green Mountain Coffee Roasters is a great buy.

---

In these volatile times, your best defense is a strong offense of fundamentally superior stocks. Make the wrong choices and your already battered portfolio could suffer even more. Make the right moves though, and you can ensure your portfolio posts profits for the entire year. The actions you take now could make or break your performance this year. Today accept your copy of the 2009 Investing Guide, absolutely FREE, so that you can get a look at the opportunities and the dangers that investors will confront in 2009.