I think some of the best companies to invest in are the so called “vice” stocks – companies that do business in addictive products, like cigarettes, coffee, etc. When your consumers are addicted, they just keep coming back!
I’ve been watching the price of Coffee and Sugar lately. After prices increased dramatically in 2010, farmers increased production to sell as much coffee/sugar as possible at the high prices. The record supply created excess stockpiles which then pushed the price back down. Economics 101 – supply and demand at work! Coffee is off more than 30% and Sugar is down more than 20%, over the past year. I’m just writing about this now because global crop production is being hit by tough weather conditions around the world so we might soon see prices stabilize or even move higher again.
Coffee & Sugar – 1 year
Coffee & Sugar – 10 years
So, can we think of any companies that buy a lot of coffee and sugar, and would like to do so right now? Starbucks & Dunkin’ Donuts come to mind. Both companies utilize the futures market to purchase their products and effectively lock-in a fixed price for the next year or longer, thus hedging price risk. If you scan Starbuck’s quarterly earnings reports, you’ll notice that they’ve stated a drag on profit margins from the rising cost of commodities (coffee, dairy, plastics, etc.) going back to 2010. You’ll also see that inventories (75% of which are coffee beans) have come down dramatically over the past year as they’ve been living off of their inventories rather than buying new product in the market. This certainly makes sense after the increase in price of coffee in 2010 to 18 year highs. With prices now 50% of their peak (30% lower over the past year), I’m sure Starbucks is busy locking in low, fixed prices to increase inventories again. International expansion and product innovation are still driving revenue growth (expected to be 15% – 20% in fiscal 2013) so I’d be willing to bet we see margin expansion over the next 12 to 18 months.
Both are on my shopping list to add to positions during downturns in the overall stock market.
Starbucks (SBUX)
Dunkin’ Brands (DNKN)
-Nick