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3 Coffee Stocks Brewing Up a Comeback

Editor's note: As part of our partnership with Nightly Business Report, TheStreet's Debra Borchardt will appear on NBR Monday (check local listings) to reveal which coffee stocks might perk up as commodity prices fall.

NEW YORK (TheStreet) -- Restaurants remain one of the key areas for job gains in this slowing economic recovery, and the stocks have followed accordingly. Where there's hiring, there tends to be good earnings reports.

Drilling down even further, coffee stocks have also had a good run -- especially category killer Starbucks (SBUX - Get Report). Any restaurant even associated with coffee has performed well. So it becomes difficult to dig out that rare restaurant stock or coffee maker that hasn't already run up.

Well, hold on to your mug, because the coffee stocks are about to get even hotter.

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Arabica coffee has dropped below $2 per pound at a time when most coffee watchers predicted the price to remain flat. Brazil, known for its Arabica beans, is expected to have a record crop this year, and that has helped drive down prices further. Starbucks is a big buyer of Arabica beans.

Robusta beans are the cheaper of the two types of coffee, favored by consumer giants like Procter & Gamble (PG) and Sara Lee (SLE). Indonesia, the third largest grower of the robusta variety, has increased production by 20%, the most since 2009. Smart coffee users will want to lock in these low prices on both varieties, and that will translate into better coffee earnings.

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While coffee stocks have been hot, in the last few days the prices have pulled back a bit as investors have taken some profits off the table. This cooling off could be short-lived once the lower coffee prices filter down to the bottom line.

Three coffee names come to mind for investors and they can be classified, like the coffee they sell, from mild to bold picks. Safe and steady Starbucks is a mild roast; Caribou (CBOU) fits in the medium category; and Sara Lee is the more speculative coffee player, and could be considered the strongest cup of all.

Word on the Street

Starbucks is to coffee what Apple (AAPL) is to tech stocks. The siren of Seattle seems to do no wrong, and its competitors just keep wishing for the company to screw up.

Starbucks jumped into the single-serve market instead of trying to fight it, signing deals with Green Mountain Roasters (GMCR). It also opened its first juice store, Evolution Fresh. There is little risk in opening one store and fine-tuning the concept, especially as fruit beverages play on the strong wellness trend that has benefited McDonald's (MCD). Even Burger King is touting its new smoothies.

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Evolution Fresh won't help the bottom line yet, but it demonstrates that Starbucks has no desire to miss out on any part of the beverage market. It will clearly benefit from lower commodity prices on coffee with its eye on the future beverage market. It's a safe stock and has been on a steady uptrend, earning its mild roast character. Jefferies & Co. analyst Andy Barish recently raised his target price to $62 and Goldman Sachs (GS)has a price target of $66.

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