Miles J. Stoner, @StockHollywood

Dallas, Texas


JVA: 86% profit from Speculation

Coffee stocks: quite the hill of beans
Forget the technology bubble; shares of coffee companies like Starbucks, Green Mountain Coffee Roasters and Staten Island's Coffee Holding Co. are surging.

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By Aaron Elstein
July 10, 2011 5:59 a.m.

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Since the start of the year, shares of Coffee Holding Co have soared 619%, to almost $27 a share from less than $4.
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There's lots of talk of an emerging bubble in technology stocks, but the really crazy action lies in coffee stocks. That's right: plain old coffee.
Shares of Starbucks are up 26% so far this year, while those of Green Mountain Coffee Roasters are up 193%. But the sector's perkiest stock is Staten Island's very own Coffee Holding Co., a family-owned operation that's been selling java under a variety of supermarket brands and other labels for around 40 years. How scorching hot is Coffee Holding? Since the start of the year, the stock has soared 619%, to almost $27 a share from less than $4.
One reason for the stock jolt: The price of  has nearly doubled in the past year, yet Coffee Holding has largely been able to pass along rising costs to its caffeine-addicted customers. Net income nearly doubled in the first half of the fiscal year ending April 30, to $2.2 million on revenues of $63 million.
Dive deeper into the financial statement, though, and you'll see that Coffee Holding's formula for success isn't really selling coffee. Most of its profit actually comes from speculating in the coffee markets.
Like many companies that sell commodities, Coffee Holding buys  contracts to protect itself against sudden price swings. If the price of coffee rises more than the cost that Coffee Holding has locked in via its futures and options contracts, then the company can make a tidy profit. And that's what has happened—big-time.
According to a disclosure buried in its latest quarterly report, the company recorded $1.9 million in gains from options contracts in the first half of the year—an amount equal to 86% of its profits.
There's nothing wrong with this, by the way. But investors should remember that futures and  are volatile, so Coffee Holding's gains could vanish in an instant. As of the end of April, it had 231  on its books.
“It makes you wonder why the company bothers selling coffee and doesn't just play the futures market,” said Dmytry Shepsen, founder of Timeless Wealth, a Toronto-based investment firm.
The company didn't mention anything about its futures-trading prowess in its latest quarterly earnings release. Instead, it attributed its earnings growth to such things as rising  forcing smaller roasters to buy its beans, its first sales in China and excitement over the ethnic coffee market after Smucker's bought Café Bustelo. (Coffee Holding's brands include Café Caribe.)
Whatever the reason,  and other speculators are chock full o' nuts for the stock, whose ticker is JVA. Although only 2 million shares are freely tradable, four times that amount changed hands last week.
A call to Coffee Holding wasn't returned.

Total words contained in a 27-page letter sent to federal regulators last month from Goldman Sachs, J.P. Morgan, and other banks objecting to new rules governing the trading of derivatives. The bank's missive warned that the rules could "damage the competitiveness of U.S. banking organizations and potentially the U.S. financial system itself."
It's surely not much fun at Morgan Stanley these days. The  firm's stock is down 18% this year, and staffers at its Smith Barney brokerage division are getting axed.
But here's a bit of cheer: Morgan Stanley's  business is growing faster than just about everyone else's. In the first half, the firm booked a 49% increase in global investment , to $2.7 billion, the biggest jump of any Wall Street shop, according to data from Thomson Reuters.
Morgan Stanley ranked third overall in the investment banking fees sweepstakes, behind J.P. Morgan Chase and Bank of America Merrill Lynch—and ahead of Goldman Sachs by $225 million.
Trouble is, investment banking fees are running about 20% below 2007's breathless pace. But that's a problem for another day.
A version of this article appeared in the July 11, 2011 print issue of Crain's New York Business.
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Filed Under : Banking, China, Coffee Holding Co., In the Markets, Morgan Stanley, Staten Island, Thomson Reuters, Wall Street
Where : New York, New York City, Staten Island
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