So in order to keep the wheels of society spinning freely, we (or at least many of us) drink coffee each day. And we tend to get our coffee in one of just a few places; in our homes, at a coffee shop, at convenience stores or at the office.

Green Mountain Coffee Roasters (GMCR: NASDAQ) might be the biggest coffee sleeper of them all in the convenience stores and office categories. With a $769 million market cap and amazing top- and bottom-line growth, Green Mountain is slowly making Vermont a coffee hotspot — and stealing some thunder from Seattle. Take a look at the Green Mountain chart for the past year:

Starbucks (SBUX: NASDAQ), on the other end of the spectrum, is on every suburban corner in America. Some corners even have two locations.

I was in the Georgetown neighborhood of Washington D.C. recently, and everywhere I walked I could smell coffee — probably because it’s virtually impossible to walk there without a Starbucks in sight.

Starbucks is an event. It’s a social thing, like going to the neighborhood bar where everyone knows your name and a fat guy named Paul (who everyone calls “Norm”) drinks too much light beer and yells at the evening news blaring from the above-the-bar television.

You go to Starbucks to see and be seen. In my opinion, their coffee is merely OK, or as a friend once put it, “outstandingly average.”

I think Starbucks — apart from their “average” coffee — is dropping the ball by trying to press the issue of expansion. I say this to mean that Starbucks might be more bloated right now than Paul after some cheese fries and half a case of beer. Have a look:

With 145,000 employees and an expansion rate that rivals McDonald’s franchises back in the good old days, Starbucks might be overextending themselves, finally watering down a brand that as recently as two years ago seemed limitless in potential. Maybe it’s due to too much variety — or too many Paul McCartney CDs. Maybe it’s their higher prices.

Actually, watching Starbucks undergo some tough times makes me smile. Kind of like how any conscience-driven American consumer has to view, with benign pleasure, dozens of ex-employees getting together and filing a class action suit against Wal-Mart for their horrific mistreatment of employees.

In short, it’s fun for the small-cap opportunities when the big guys step in a pothole.

A potentially slipping Starbucks is also good because it means even more daylight for Green Mountain. Forbes has for each of the past three years named Green Mountain one of the “200 Best Small Companies in America,” making them a genuine lion in waiting and an approaching problem for competitors like Starbucks.

Green Mountain serves over 7,000 wholesale accounts, and has thousands more accounts served indirectly by distributors. They sell coffee direct to the consumer via their website. They sell organic and free trade blends. They have seasonal lineups. And all their coffees taste great — no matter where you’re getting them.

Q3 2007 results recently came out, and Green Mountain continues to shine. Total net sales were up 73% from the same quarter last year, the direct-to-consumer arm of the company shipped 42% more pounds of coffee than the year before, and the “resellers” arm increased shipped pounds by 147%. Resellers here include companies like Keurig Inc., which may even operate a K-Cup machine in your coffee break room at work.

Net income for the quarter has nearly doubled over last year’s numbers, and Green Mountain continues to come to new locations each day.

Next time you’re in the convenience store on the way to work, see if you’re buying Green Mountain coffee. They’re growing right now and raking it in like Starbucks used to.

Regards,
Aaron Gentzler
September 17, 2007

P.S.: Green Mountain Coffee Roasters is just one of many small-cap opportunities out there right now. For a full report of what “the expert,” Greg “Gunner” Guenthner, thinks is the hottest thing to come along since canned beer, check out his latest issue of Penny Stock Fortunes and read his CXS Money Multiplier System analysis.

Penny Stock Coffee Makers was originally featured in the Penny Sleuth.