The Stock Market's Coffee Craze

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Despite the recession, "consumers are becoming more particular," he says. "We want good coffee and we're willing to pay for it."

McDonald's May Be Helping

One sign that specialty coffee is still on the rise is that it's been embraced by mass-market chains like McDonald's (MCD) and Dunkin' Donuts. Both have upgraded their coffee offerings in an attempt to steal business from Starbucks.

But instead of seriously hurting Starbucks' business, the marketing push from McDonalds this year may have actually sparked more interest in coffee in general. That's what Starbucks Chief Executive Howard Schultz said in July, telling analysts: "It appears that the various marketing campaigns and all the media coverage of our coffee has created unprecedented awareness for the coffee category overall."

Peet's Coffee & Tea (PEET) is a company that prides itself on the very highest-quality coffee, sold both through supermarkets and its own coffee shops. On July 28, Peet's announced quarterly earnings per share 24% higher than a year ago. Despite the tough economy, revenue rose 5% from a year ago.

Can It Last?

Grocery store sales were also up 10% and Peet's market share was up 10%—showing customers were willing to pay more for quality coffee at home. "Peet's may very well be one of the few premium-priced brands in the grocery store achieving strong sales and share growth despite the economic and competitive environment," Peet's President and CEO Patrick O'Dea told analysts. Peet's shares are up 17% this year.

Perhaps investors shouldn't have been surprised that coffee would hold its own during the downturn. Coffee is relatively inexpensive, particularly when prepared at home, Van Winkle notes. Also, he adds, "we are talking about an addictive product."

The question for investors now is whether the coffee craze can continue. Many coffee stocks have gotten rather expensive. Green Mountain shares trade at more than 60 times 2009 earnings. Companies like Caribou and Starbucks are in the midst of turnarounds that are still in early stages. At the beginning of 2009, Caribou reported its first quarterly profit since 2005.

Some coffee stocks may have further to run, though only if current growth trends continue and even accelerate. With coffee shares at these heights, investors need to be especially alert to signs the country's love of coffee has run its course.

Steverman is a reporter for Bloomberg News.