Overrated/Underrated: Coffee Stocks

Starbucks is losing out as java junkies prefer the organic stuff from Green Mountain Coffee Roasters.

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In the past six months, coffee giant Starbucks has seen its stock go cold, falling by some 25 percent. And with many consumers cutting their extravagant spending (like $5 on mocha frappuccinos) the Seattle-based company has had to cut back, too. It eliminated 600 jobs earlier this year and is planning to drop prices and sell more drip coffee. Pat Dorsey, director of equity research at Morningstar, called the poor performance projection a "big old bomb." He blames the weakening consumer who "is cutting back on those $2 cups of coffee and $4 lattes."

The company predicts less growth in 2008 than in 2007. Starbucks plans to open around 1,020 stores in the U.S. in the 2008 fiscal year, down from 1,799 in fiscal year 2007. Starbucks says it wants to concentrate more on foreign markets.

Green Mountain Coffee Roasters

Eclipsing Starbucks' weak coffee (stock) is Vermont-based Green Mountain Coffee Roasters , which now stands around $40 per share, down from its a high of $43 on May 30. Earnings per share are expected to go up 48 percent this year. The once-obscure coffee maker is now a provider for McDonald's and Exxon Mobil gas stations. Green Mountain embraced the demand for organic beverages, partnering with Newman's Own Organic in 2005 to make organic coffee available in 650 McDonald's restaurants. Alan Brochstein, founder of AB Analytical Services, says Green Mountain "is about the only coffee investment working these days."

Diedrich Coffee Inc.

After its sale of 40 stores to competitor Starbucks, Diedrich Coffee has been sputtering. It has 153 stores left. The Irvine, Calif.-based company, which also operates under the names Gloria Jean's and Coffee People, has seen its stock tumble to $2 per share. The high in 2005 was $9.

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