How To Play The Dunkin' Brands IPO

Dunkin' Brands (NASDAQ: DNKN) priced its initial public offering today at $19 per share, above the estimated $16 to $18 range.

Most investors will not be able to get in on the IPO itself, but will have to wait to buy the shares in the aftermarket, after the majority of the move has already been made.

So how can investors cash in on the Dunkin' drama?

Go long the coffee stock craze.

Names like Peet's Coffee & Tea, Inc. (NASDAQ: PEET), Starbucks Corporation (NASDAQ: SBUX), Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR), Coffee Holding Co., Inc. (NASDAQ: JVA), and Tim Hortons (NYSE: THI) are all at or near new 52 week highs, and continue to move higher.

Before finally succumbing to the law of gravity, shares of Coffee Holding moved some 400+% after the company reported strong earnings a couple of months ago. The company reported earnings of 22 cents per share on $37.3 million in revenues, which was a rise of 87% year-over-year in revenues. When the company reported earnings on June 9, shares jumped 45% that day.

Peet's and Starbucks are two of the most well-known competitors to Dunkin' Brands, but only Peet's has the growth capabilities that Dunkin' does. At less than $700 million, the company is nowhere near the size of Starbucks and should be able to grow at higher growth rates than Starbucks. The majority of Dunkin's stores are in the Northeast, with virtually no stores in the Midwest. There is tremendous opportunities for growth there.

In addition to the company specific outlook, the macro outlook for the coffee names has improved as well. Coffee prices, while still elevated, have come down, and there is renewed interest in the space. Earlier this year, Starbucks and Green Mountain announced a partnership that would put Starbucks K-cups into Green Mountain's Keurig machines.

In Dunkin' Brands prospectus, it says, "We believe there is a significant opportunity to grow our points of distribution for Dunkin' Donuts in the U.S. given the strong potential outside of the Northeast region to increase our per-capita penetration to levels closer to those in our core markets."

America runs on Dunkin'. Your portfolio may not, but it could use a quick pick-me up from some of these coffee names.

ACTION ITEMS:

Bullish:
Traders who believe that Dunkin' Brands will grow sharply might want to consider the following trades:

• Take a look at any of the above mentioned coffee related names. New enthusiasm for the group, as well as favorable investor sentiment could lead to higher valuations.

Bearish:
Traders who believe that the Dunkin' Brands IPO will be a top in coffee stocks may consider an alternate positions:

• Short all of these names. Green Mountain reports tomorrow, and shares have rose some 150% this year. If Green Mountain misses and Dunkin' does not price as well as expected, there could be serious wind taken out of these sails.

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