May 20th, 2006

Coffee Wars: Krispy Kreme (KKD), Peet’s (PEET) and Starbucks (SBUX)

On reading this you may think you’re seeing symptoms of schizophrenia. And is it possible that “competitors” in the same industry can move in completely opposite directions? I know it sounds crazy … it does to me …. but here are three stocks that have moved in diametrically opposite directions over the last 3 years. And according to my read of the stock charts, will continue moving in opposite directions over the next several months but, from now on, in the reverse directions.

Krispy Kreme Doughnuts (KKD)

The experience for those playing KKD since its IPO in April, 2000 must have felt like being on a roller coaster. First, over a 300% increase from IPO to the beginning of a 2002, then a two-year 26-42 trading range and, finally, a 90% drop to the $4 range with the news of goverment investigations, the Atkins diet craze and other adverse news. But the stock looks like it’s made a bottom and is trying to build momentum for a breakthrough of significant resistance levels:

KKD was one of the stocks in my CNBC Squackbox Challenge Fantasy Portfolio since I was anticipating a break through of a primary resistance trendline at 9; it did break through but the move to 12 was sufficient only to put me in a top-3% ranking. The stock has since retreated … back to that trendline which is now support … and looks like it’s building up a head of steam for another assault on the second, and even more significant, resistance trendline. KKD continues to stay above rising 90- and 180-day moving averages. Success at breaching that resistance could mean further upward momentum for the stock.

A look at the fundamental (click here for news and blog comments) news points to some of the same factors (new management, international expansion, closure of unprofitable locations, brand extensions, broadening of product lines and settlement of lawsuits) that has lead to past breakouts in others stocks.

Peet’s Coffee and Tea (PEET)

Peet’s was a successful January, 2001 at 8 that grew 290% to a peak of 37 in July 2005. Since then it’s been building an consolidation narrowing penant between 28 and 32. It’s unclear whether it will break through the top resistance trendline or down through the bottom support trendline:


This is a stock where it pays to wait for the stock to signal the direction of it’s future move.

Starbucks (SBUX)

Starbucks is the juxtaposition to Krispee Kreme. After adjusting for stock splits since its IPO in July, 1992, SBUX has been a rocket vaulting nearly 5000% from $0.70 to over $35. Clearly, SBUX is everyone’s favorite. It was the first company featured on CNBC’s American Made series, CBS’ 60 Minutes and is a favorite of Jim Cramer on his MadMoney show. SBUX was also one of IBD’s market leaders (although it made it to the IBD100 only once, April 14, at 95). And yet, SBUX’s future may be bucking up against the huge critical mass of it’s own growth history.

SBUX is beginning to violate all the rules Jim Cramer has set for growth stocks such as regional footprint with opportunty for many more store openings (are the Chinese actually going to switch from drinking tea) and focused product offering (what about those 45 cd-burning stations being pulled from Seattle and Austin locations). SBUX is beginning to look like a stock that fits Cramer’s rules for stocks you need to sell.

Over the past two years, SBUX has seen resistance at both 28 and, even more significantly, at 32. As contrasted with KKD, which is moving up through 50- and 90-day moving averages, SBUX has just recently broken down through them; the 180-day moving average is 4 points, or 10% away. Having turned along with the market at 40 on May 5, it’s fair to assume that SBUX could be swept along with any continued downdraft in the overall market down to those resistance levels and even, perhaps, to testing the upward sloping support trendline which by that time could be at around 26.

Conclusion:

I’m not recommending that you do the same but I’ve sold SBUX short and have taken a long position in KKD. The next several months will tell whether these were the right moves.

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