The past week saw the S&P500 post the worst loss since April and my list of potential superstocks was not spared. The pullback did, ho...

Weekly Superstock Scan 20 Jun 2016 - 24 Jun 2016: JVA

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The past week saw the S&P500 post the worst loss since April and my list of potential superstocks was not spared. The pullback did, however, bring some of the stocks closer to the low risk entry point. We will cover this later on in the potential superstock recap.

This week, the potential stock of the week is Coffee Holding Co., Inc (JVA). Being an avid coffee drinker, I am excited to find a coffee related stock. JVA is an integrated wholesale coffee roaster and dealer in the United States. JVA has been a family-operated business for three generations. Their core products can be divided into three categories:

  • Wholesale Green Coffee: unroasted raw beans imported from around the world and sold to large and small roasters and coffee shop operators;
  • Private Label Coffee: coffee roasted, blended, packaged and sold under the specifications and names of others, including supermarkets that want to have their own brand name on coffee to compete with national brands; and
  • Branded Coffee: coffee roasted and blended to their own specifications and packaged and sold under seven proprietary and licensed brand names in different segments of the market.





Technical



Broke Out from Downward Sloping Base

JVA has been on a downward trend since the middle of 2014. Price slowly creep from $6 all the way down to $3 below a trend line. 

Three weeks ago, price finally broke above the trend line with massive volume. 15 times its average weekly volume no less. The surge comes upon better than expected second quarter results. The market had probably expected a drop in earnings as a result of lower transactions with Keurig Green Mountain, JVA's biggest customer. JVA unexpectedly posted a bigger than expected profit and sent its stock surging.

Even though JVA could not hold its high and closed near the bottom of its daily range, price continued to move up in the coming days and weeks.

Fundamental



Turnaround with Sequential Growth

JVA has successfully achieved four consecutive profitable quarters and the same number of sequentially improving quarters. That also implies that year-on-year comparison may be easy with a $0.02 cents EPS for 2Q 2015.

Positive Effect from Ending Deal with Keurig

With the acquisition of Keurig Green Mountain by JAB Holding, JVA's wholesale transactions with Keurig has greatly decreased. Year-on-year, revenue fell close to 30%, or $8.86 million, of which $8.16 million is contributed by Keurig.

The cost of goods sold for the quarter fell by $13.2 million year-on-year. Removing the effects of hedging, COGS still decreased by $9.1 million. This suggest that even though Keurig was be JVA's largest customer, it does not contribute to JVA's profitability.

Keurig may provide JVA other indirect benefits through economics of scale with the increased volume, but losing the deal will also allow JVA to cut its G&A expenses. In the current quarter, losing the deal has allowed JVA to turned a loss into a profit. We will need to wait for the results in the upcoming quarter and post-transition, JVA may be even doing better than before.

Moving away from Wholesale for Better Margins

JVA is moving away from a focus on commodity type sales of wholesale green coffee to a renewed focus on branding, farm identification, traceability and sales of specialty gourmet micro lots of Arabica coffees. This will help JVA sustain and improve its margins during a period of historically low green coffee prices.

JVA is also focusing more on its proprietary and licensed brand names. Its flagship brand,  CafĂ© Caribe, is expected to roll-out in 400 Wal-Mart stores this month and in an additional 200 supermarket stores later this summer.

Low Float

The number of shares outstanding stands at 5.4 million. With a 3 month average volume of 157 thousand, the float is only 34 times its average daily volume. The low float and low ratio make the stock volatile and provide an opportunity for high returns.

JVA has a stock repurchase program in place and this will further help to reduce the float.

Low Valuation

Using the most recent quarter's earnings of $0.14 and annualising it, JVA is currently trading at just 9 times its earnings. With a low valuation JVA has plenty of room to move if it can retain its growth rate.


Risk Factors/ Things I do not Like


  • Commodity Risk - Green coffee is JVA's largest single cost of sales. If the cost of wholesale green coffee increases, JVA's margins and earnings will suffer. While JVA is usually able to pass on the increase in cost to the customers, it is unable to completely do so if the price increases rapidly or substantially.
  • Hedging policy - JVA uses coffee futures and options contract to hedge against changing coffee prices and to guarantee and adequate supply of green coffee. In recent quarters, JVA incurred losses on these options in some of the recent quarters which led to decreased profitability. JVA decided to scale down on its use of hedging. Whether it will be a correct choice will depend on the market conditions. A rapidly increasing coffee price in the future will heavily punish JVA.


Potential trade setup

The current price is too high to be considered a low risk entry. A possible low risk entry will be placing a trade when the stock hit the 10wMA again. Alternatively, if the price consolidates with decreased volume at the $5 level, it will be a potential low risk entry too.

The $5.8 region will be a trouble area, having served as both support and resistance in the past.

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Previous Superstocks

HBP (Posted on 5th June 2016 Watchlist)
Beginning to consolidate but still far from low risk entry

BOSC (Posted on 5th June 2016 Watchlist)
Now it looks like it may approach the 10wMA in the next two weeks.

AVHI (Posted on 29th May 2016 Watchlist)
Entered at 13.105 and exited at 12. Exited too early as price is at low risk entry.

EHTH (Posted on 15th May 2016 Watchlist)
Starting to consolidate, may start a pilot buy as 10wMA has not caught up

GDEN (Posted on 24th Apr 2016 Watchlist)
Closed right above the 10wMA. Will buy if bounce off here.

EXFO (Posted on 10th Apr 2016 Watchlist)
Entered @ 3.8 and 3.9. Regained 10wMA but flattening 10wMA is a concern.

BORN (Posted on 3rd Apr 2016 Watchlist)
Closed below 30wMA. May stop coverage of stock if it does not regain momentum.

PLPM (Posted on 27th Mar 2016 Watchlist)
My stop buy got triggered due to low liquidity and pushed price up artificially. It dropped like a rock from there. Painful lesson learnt

SNC (Posted on 6th Mar 2016 Watchlist)
Entered @ 11.95. Exited at 10.4 as price closed below 30wMA and gap.




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