Quick, what’s the similarity between the following?

1. Diageo Plc
2. A pot of steaming-hot dark roast coffee
3. Diedrich Coffee, Inc.
4. A pint of ice-cold Budweiser

This is no trick question, and the answer is very simple. But before I tell you the answer, let me give you a short introduction to the above four choices.

1. Diageo (DEO:NYSE) is an international manufacturer of spirits, wine and beer. Guinness, Smirnoff vodka, Johnny Walker scotch, Baileys Irish cream and Captain Morgan rum all come from Diageo’s breweries and distilleries.
2. A pot of steaming-hot dark roast coffee is just that — a pot of steaming-hot dark roast coffee.
3. Diedrich (DDRX:NASDAQ) is a $55 million company and sells coffee under the Diedrich Coffee, Gloria Jean’s and Coffee People brands.
4. And shame on you if you don’t know what a pint of ice-cold Budweiser is.

So what’s common to all the above? They are all products or companies that make products that require brewing. And trust me, brewing is a great business. After some quick number crunching and sorting through several stocks, I have come to the rather idiosyncratic conclusion that anything that requires brewing could be worth investing in.

Take coffee, for example. Who would have thought brewing beans could be an $18 billion market in the United States? In fact, according to the International Coffee Organization, Americans consumed 4 kilograms of coffee per person in the year 2000 alone. That’s about 400 million cups of coffee per day.

To meet this incredible demand, America imports over $4 billion of coffee each year. And we have at least one coffee shop per 66,000 people in the United States. So why exactly is coffee so popular?

Needless to say, caffeine is addictive (that means repeat business, which is good for coffee sellers). And running over to your neighborhood coffee shop is the best antidote to office boredom. Here are some coffee stocks that could serve up grande profits for you:

– Peet’s Coffee & Tea Inc. (PEET:NASDAQ) is a specialty coffee roaster and marketer. The company also sells brewing equipment and other related merchandise. Peet’s has 111 retail stores nationwide. The company is impressively debt free and earned $175.2 million in revenues last year. Mutual funds seem to like this stock: the Morgan Stanley Small Cap Growth Fund, the Baron Growth Fund and the Wasatch Small Cap Growth Fund all own shares of Peet’s Coffee

– Diedrich Coffee sells branded coffees like Diedrich Coffee, Gloria Jean’s and Coffee People. While the stock seems cheap on a trailing P/E basis, the company does have negative operating cash flow and some debt. The company has plans to continue growing its franchise business, and its stock might be worth watching for once Diedrich’s growth plans are on track.

Caribou Coffee Company (CBOU:NASDAQ) might interest you if you like IPOs. The company went public in October of last year and is expected to experience 75% revenue growth next year. Insiders at this debt-free company have bought nearly 50,000 shares since late last year.

Will one of these small-cap coffeehouses turn out to be the next Starbucks? They certainly have plans to; so keep them on your watch list while they brew up growth plans.

Regards,

Sala Kannan

Penny Sleuth Contributor

The Penny Sleuth also features commentary by other financial analysts, small-cap experts, investment gurus and an array of contributors from various fields and occupations. Their diverse insights and contrarian investing ideas are hand selected by the Penny Sleuth editors.

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