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). 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.
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.
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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