Breakout

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Hedge the Price of Your Coffee With Shares of Starbucks: Najarian

Breakout

Rising commodity prices get front page treatment, but price drops are printed near the obits. Consider coffee beans. From the spring of 2010 to May of 2011 coffee futures on the ICE more than doubled, hitting multi-decade highs. Chilling predictions of 5 to 10 fold increases by 2014 were making the rounds. The stories painted a horrifying picture of a world gone mad for want of caffeine.

Naturally, the peak in coverage coincided perfectly with a peak in prices. If you missed the news you're not alone, most major media outlets to have overlooked the drop as well. The same can't be said of the co-founder of OptionMonster.com Jon Najarian. In the attached clip, he explains where there's opportunity that most people aren't seeing.

Arabica coffee bean prices are down 50%, yet the price per cup at your local Starbucks (SBUX) is not. That gives the company a margin edge thanks to the same sourcing program that allowed it to raises prices along with the competition back in 2011. The coffee Starbucks uses doesn't grow itself. It's bought through a socially responsible program overseen by third parties. According to the company the practice ensures suppliers give workers safe, fair and humane working conditions. It's a relatively expensive way to source it's largest input, eliminating some of the cost advantage Starbucks gets from the beans it grows itself.

When bean prices move lower, Starbucks is able to take advantage of the decline in the marketplace and retain most of the price hike in its stores. That gives the company a margin kicker to the natural advantages it already has over its competition.

The company does well in both rising and falling markets, notes Najarian, but the average individual investor may not anticipate or appreciate the earnings growth getting built into every SBUX quarter with the drop in bean prices.

"I think Starbucks is probably a screaming 'buy' because of this big correction you've seen in this major input."

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