In my weekly premium newsletter -- Undiscovered Micro-Cap Gems -- my goal is to introduce readers to a variety of promising micro-cap investing ideas that they may wish to consider for their portfolios. In doing so, I generally look for small, neglected companies that have been overlooked by conventional Wall Street sources. I also look for undervalued firms that are trading at a steep discount to their intrinsic value. Many of these individual investment ideas have the potential to deliver triple-digit percentage gains in the years ahead.

Below you'll find an in-depth look at one such investing idea that I introduced my readers to in a recent issue. To gain access to dozens of similar investing ideas each and every week, you'll need to subscribe to my Undiscovered Micro-Cap Gems service. In the meantime, I sincerely hope you enjoy today's sneak peak at one of my most recent micro-cap investing ideas...

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Diedrich Coffee (DDRX, $5.30)
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Diedrich is one of the nation's largest coffee sellers, operating more than 200 coffeehouses in the U.S. Aside from its extensive retail operations, the company also provides coffee and related products to hundreds of wholesale accounts, including restaurants like Ruby Tuesday.

Although Diedrich is the country's number two coffee chain, it operates in relative obscurity under the shadow of its much larger rival, Starbucks (SBUX). However, as is often the case, Starbucks' superior name brand recognition comes at a steeper price. Currently, investors are shelling out more than $3 for each dollar of revenues at the Seattle-based giant. That compares to just $0.50 for each dollar of revenues for Diedrich, which trades at just half of last year's $54 million in sales.

That compelling valuation provides shareholders with a decent margin of safety. Companies that are priced for perfection must deliver on those lofty expectations; otherwise they can be highly vulnerable to punishing sell-offs. For example, rival Peet's Coffee -- which trades at similar P/E multiples to Starbucks -- reported impressive second-quarter financial results last week. Net income soared +46% to $2.6 million on sales that climbed nearly +25% to $41.7 million. Furthermore, earnings came in at $0.18 per share, outpacing estimates by two cents. However, the market had priced in even better results, and responded by pushing the shares nearly -7% lower on the news.

Meanwhile, the bar has been set much lower for Diedrich. As a result, not only will weak results be less likely to induce heavy selling, but any upside surprises could also be very rewarding for shareholders.

However, inexpensive stocks often trade at rock-bottom prices for valid reasons, and an attractive valuation alone is not sufficient to warrant DDRX a spot in my portfolio. Fortunately, there are a number of other reasons to take a closer look at the company. To begin with, Diedrich has a healthy balance sheet, with $18 million ($3.41 per share) in cash on the books against very little long-term debt. Furthermore, corporate directors and institutional owners hold more than half of the firm's outstanding shares, and insider activity has been generally positive. Finally, the company is free cash flow positive, with operations that have generated more than $2 million in cash over the last twelve months.

Through the first three quarters of the fiscal year, although total revenues only ticked up by about +2%, the company posted an impressive +5% gain in same-store sales, as well as a +32% spike in online revenues. Over the same period, wholesale revenues rose by $660,000, or +6.2%, thanks to a +22.6% increase in sales to third party distributors.

Earlier this year, Diedrich sold the international operations of its Gloria Jean brand to an Australian franchisee for an after-tax gain of $15.5 million. According to the terms of the deal, the company is also slated to receive additional payments totaling $7 million over the next seven years. Management has earmarked the proceeds for domestic expansion.

A renewed focus on domestic brands is a sound long-term decision that has given Diedrich, in the words of CEO Roger Laverty, "a fresh start." Not only has it unlocked substantial shareholder value, but it has also given the firm a mountain of cash to fund future growth opportunities. Though the company's stock has lagged the industry over the past five years, I believe management has taken the right steps to bring DDRX more in line with competitors.

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Important Note: The above article was merely a small excerpt from a recent issue we sent to subscribers of our premium value investing service -- Margin-of-Safety Investing. In each issue of that newsletter, editors Nathan Slaughter and Paul Tracy deliver an in-depth look at a variety of other deeply discounted stocks that should provide investors with a solid margin of safety at current prices. To receive your copy of our most recent issue of Margin-of-Safety Investing, as well as other guidance similar to this twice per month, you'll need to subscribe to this publication. To learn more, please visit:
https://www.streetauthority.com/subscribe-msi.asp

Thanks for reading!

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