You might not believe it based on the number of coffees in the supermarket aisle, but the United States is far from the largest coffee consuming population. Sort of. While Scandinavian countries far outpace the U.S. in per capita consumption, the U.S. imports more coffee than any other nation. In fact, only the entire European Union (27 nations) imports more coffee than the United States. What does that have to do with the stock market?
A well-known market analyst once quipped that “bull markets run on caffeine and sugar.” While the reference may sound tongue-in-cheek, it definitely rings true if you consider that U.S. sweetener and caffeine consumption levels have closely tracked long-term rises in the S&P 500 Index in the past. And you can play America’s escalating caffeine addiction with caffeine stocks.
It shouldn’t be surprising that companies which make food and beverage products aimed at caffeine lovers tend to be leaders in bullish market environments. With the S&P 500 having risen over 30% from its March low, it’s fair to say that a new bull market is most likely underway. The fact that caffeine stocks are outperforming the S&P and other major averages is even more encouraging.
If you agree the bull is back, then you might consider taking a closer look at the leading coffee, soda and energy drink companies. So let’s examine some of the top hyper-caffeinated performers of this latest bull run.
Brewing a cup of tasty stocks
Caffeine Stock #1: Starbucks (SBUX)
When most people today think of caffeine, they think of Starbucks (SBUX). With top-line sales of $27 billion in 2019, Starbucks is the world’s largest coffee retail chain with over 30,000 stores globally and a presence in virtually every city of size in the U.S. Although in-store sales in the U.S. were negatively impacted by the pandemic, nearly 100% of its stores in China remain open and the firm plans to open 500 net new stores in fiscal 2020. Its Nitro Cold Brew has been a recent sales leader for the company, and its mix of hot and cold caffeinated beverages were strong sellers in grocery stores nationwide during the shutdown.
While the firm has suspended earnings guidance for the rest of 2020, analysts believe that as more states re-open their economies, Starbucks is poised for a strong sales rebound in the U.S.—especially given that 80% of pre-COVID customer occasions in stores were to-go, which should make it easier for the firm to transition to a more restricted post-COVID environment.
Starbucks’ management is confident it has the financial strength to make investments for the long term while navigating short-term challenges, and it’s worth noting that SBUX stock has tended to outperform the S&P during past bull markets. That said, I expect the outperformance in SBUX to continue in the six to 12 months ahead.
Caffeine Stock #2: Restaurant Brands International (QSR)
Restaurant Brands International (QSR) is the parent company of Tim Hortons, Canada’s largest quick-service food chain, as the result of a 2014 merger with Burger King. Hortons is especially beloved by Canadians for its delectable coffee, and it’s one of the largest java vendors in the world. The firm unfortunately struggled during the coronavirus crisis, as daily sales were down 40% in March due to a precipitous drop in the number of commuters.
But as governments gradually open up economies, the company has plans to lure customers back by implementing new safety standards in its stores, including sneeze guards at order counters, temperature tests for employees and floor markings to encourage social distancing. What’s more, management plans to fully re-open Tim Hortons dining rooms across Canada. Since the onset of COVID-19, Hortons has quickly rolled out home delivery services, going from around 250 restaurants participating to more than 1,000 in less than two months (and still growing). While QSR isn’t my favorite caffeine stock, the company appears to be well on its way toward recovery, a factor which is already reflected in the stock price.
Caffeine Stock #3: Monster Beverage (MNST)
One of the best-performing caffeine stocks is Monster Beverage (MNST), the maker of the popular Monster Energy drinks. This fast-growing company managed to flourish during the coronavirus economic slowdown, as highlighted by a 12% net sales increase and an 8% per-share earnings boost in this 2020’s first quarter. While sales briefly dipped during the early stages of the coronavirus lockdowns, they roared back to life in April as energy drink sales skyrocketed in the U.S., with sales of Monster increasing 138% year-over-year. Meanwhile, the firm’s share of the coffee-plus-energy category—which includes stiff competition from Starbucks products—rose to 54% in April.
The cash-rich company ($935 million) has the added benefit of a lucrative partnership with industry giant Coca-Cola (KO), which acquired a 17% stake in Monster Beverage in 2015. The deal has helped extend Monster’s retail distribution reach and has been integral to the company’s current (and likely future) success.
Shares of MNST are up almost 40% from the March low, but an important chart “resistance” at the 70 level (the February high) is being tested. Profit-taking is normal around major resistance levels like this one, so I wouldn’t be surprised if the stock pulls back or spends some time consolidating beneath the 70 level. But the firm’s growth story is too impressive to ignore and should continue to attract attention from institutional investors, which I expect will eventually push shares to new highs.
Caffeine Stock #4: Keurig Dr Pepper (KDP)
Although shutdown orders forced millions to forgo their morning ritual of visiting their favorite coffee shop, home-brewed coffee experienced something of a renaissance. Keurig coffee makers have surged in popularity in recent years since they allow consumers to sample their favorite coffee shop beverages (including Starbucks, Dunkin Donuts and Caribou coffees) in the form of single-serve K-Cup pods. Earnings and revenue for the machine’s maker, Keurig Dr Pepper (KDP), were higher in Q1 and, unlike many companies, it reaffirmed its 2020 guidance. For full-year 2020, Keurig Dr Pepper expects diluted earnings to be an above-consensus $1.38 to $1.40 per share, while also anticipating net sales growth of 3% to 4%.
Analysts further expect the firm’s earnings to rise, as its diverse offerings (including coffee, tea, juices and soft drinks) should keep the caffeine-craving consumer’s interest alive. The company is also expected to maintain a stable dividend and remains well positioned to continue growing, thanks in part to its ever-expanding product portfolio. After its recent 40% rally, investors who are interested in KDP should consider using pullbacks to do some nibbling in this stock.
These companies are among the top performers in the caffeinated beverage category and should be able to benefit from any improvement in economic conditions. Assuming a new bull market is underway, investors should expect that caffeine stocks will continue to show relative strength as the nascent bull grows to maturity.