Coffee – Investors supportive of coffee retailers; Hedge funds negative about producers

Whilst the French strike over pensions, the UK shrink their state, the US ponders further quantitative easing, and the bubble inflates further in Asia, where to invest safely? Regardless of what’s going on, everyone drinks coffee. We will look at Starbucks Corp - NASDAQ:SBUX, Whitbread Plc - LON:WTB, Sara Lee Corp - NYSE:SLE, Kraft Foods - NYSE:KFT, Caribou Coffee Co - NASDAQ:CBOU , Peet’s Coffee and Tea - NASDAQ:PEET and China Resources Enterprises - HKG:0291.

Think of coffee and Starbucks springs to mind and quite deservingly so as the world’s largest coffeehouse. Last week’s fourth-quarter and fiscal year end results drove the shares to a new 52-week high. Investors are optimistic (is it a vote of confidence for its foray into wine, beer and cheese?) in this soon to be 40 year old company. Short sellers have been covering their positions since August, decreasing short interest from 3.5% down to 1.5%. Meanwhile funds who lend continue to invest in Starbucks, leading to continuous all time highs in Institutional ownership at 182 million shares or 24.6% of the company.

UK listed Whitbread has gone from strength to strength, recording exponential growth with the shares closing in on the levels achieved in 2007. Plans are in place for the current 1,700 Costa stores in China to increase to 3,000 by 2015 under the new CEO, who takes his position next month. There has been no short interest activity over the last six months in Whitbread. However, the percentage of shares outstanding on loan has increased to 2.5% over the past two weeks which may be due to dividend arbitrage. Institutional ownership has fallen by 2 million since August to 36 million shares or 20%.

Asia, particularly China is currently a major growth area for coffee houses with the market growing by approximately 20% a year. International companies such as Whitbread and Starbucks are not alone in spotting this profitable opportunity as national and Asian operators ramp up the competition. China Resources Enterprises, owner of Hong Kong’s second-biggest coffee chain plans to open 1,000 coffee shops in China. Investor sentiment is positive as short interest remains low at 0.4%, whilst institutional ownership has increased from 160 million to 250 million since March. This is 10.5% of the company.

Although the coffee retailers are subject to bullish sentiment focusing on future growth, it is a different story for the producers, which are having to absorb the majority of costs.. Peets Coffee & Tea has seen short interest increase from 11% in May to a 52-week high at the start of October of 22%. Since May short interest in Caribou Coffee has increased from 1.6% of total shares to 3% and is now at 2%.

Rising coffee prices along with other commodities increasing in cost has filtered through the supply chain to the retailer. Starbucks has already increased the price of its coffees and lattes. These price increases are also filtering into the supermarkets as the corporations behind household brands increase prices. Global food giants, Kraft and Sara Lee have finally been forced to increase coffee related retail prices as a result. Short interest in Kraft is flat at 0.6% with institutional ownership rising from 310 million to 400 million shares over the year. Sara Lee has been subject to short covering since May, reducing short interest from 6% to 0% of total shares outstanding on loan. However, in this time institutional ownership has fallen by 30 million to 155 million shares.