We're Initiating a New Position in This Oversold Bullpen Stock

* We are using the oversold and exaggerated reaction to Dutch Bros earnings to start a new position in the shares.

* Our rating is a One with a $39 price target and a panic point of $24.

Symbol	Transaction Type	# Shares Traded	Recent Price $	Shares Owned After Trade	% Portfolio
BROS	Buy	1,900	29.35	1,900	1.3

After you receive this Alert, we will buy 1,900 shares of Dutch Bros BROS at or near $29.35. Following the trade, BROS shares will account for roughly 1.3% of the portfolio.

We shared earlier that if the post-June quarter earnings outsized negative reaction pulled the shares of Dutch Bros into oversold territory, we may be inclined to use that drop to start a position in the name. The last three times BROS shares were oversold — in May 2022, October last year and this past May — all proved to be smart entry points.

The trading volume in BROS shares today is well above average, which tells us the short interest in BROS is being flushed. That combination and prospects for EPS growth of more than 20% in the coming quarters are leading us to make this starter trade in BROS, establishing an initial price target of $39 and a panic point of $24. Given the risk-reward trade-off, we are placing a One rating on BROS.

While the shares may trade sideways in the very near term, we will aim to grow the position size prudently with the same being said for our other new positions, Meta Platforms META and Eaton Corp. ETN. Yesterday, we discussed this could lead to some tough decisions across the portfolio’s positions but as these are made, we will communicate them with you in a clear manner.

Today’s drop in the stock price doesn’t reflect the continued expansion plans for Dutch Bros, a time-tested strategy for companies of this kind. As we noted in our earlier comments, BROS exited the June quarter with 912 locations across 18 states, up from 831 in 16 states at the end of 2023. That compares to 17,068 Starbucks SBUX locations and 9,151 Dunkin Donuts shops in the U.S. at the end of June, suggesting Dutch Bros has ample room to expand across the lower 48 states. As that happens, we see further revenue growth ahead in the coming quarters.

We also liked the favorable operating leverage reported in the company’s June quarter, with its operating margin hitting 10.8% vs. 8.8% in the year-ago quarter. That was, in our view, far better than expected given the impact of the April 1 minimum fast-food wage increase that went into effect in California. As the company expands its footprint outside of California, that wage impact should improve as it continues to reap the benefits of its increasing scale.

All this should allow the company to continue to deliver far stronger EPS growth compared to the S&P 500 in the coming quarters. And as the Fed enters its rate-cutting cycle, we could see hurdle rates for new construction projects fall. Given its cash-rich balance sheet, access to capital, and current footprint, that suggests Dutch Bros could continue to expand at a healthy clip in 2025.

In thinking about coming quarters, we have to recognize that like many other companies, Dutch Bros will be bumping up against tough same-store comparisons due in part to past price increases. That helps explain management’s guidance for comp sales to be in the low single digits. Because of the company’s business, which skews toward coffee-based beverages, part of our ongoing homework for the position will be to monitor coffee and dairy prices. So far coffee prices are up meaningfully this year, and if that trend continues, we could see margin expectations, and therefore EPS forecasts, get dinged.

(Please note that we are looking to execute these trades at or near the share price mentioned above. Once the trade is completed, subscribers can see the trade's executed price here. Be sure to toggle the chart to sort by Purchase Date.)

At the time of publication, TheStreet Pro portfolio was long META and ETN.