If Starbucks is doing so well at experiencing growth after its reorganization two years ago and all indications is that the company is here to stay, why are pundits calling the retail chain an excellent short sale opportunity? by Bill Gee
(centrist)
Tuesday, May 17, 2011
As I mentioned in my previous column about Whole Foods, as a small-scale investor, I try to follow two very basic rules of thumb when it comes to where to make my stock purchases. Rule #1: Invest in companies that you believe are doing the right thing for both their customers and the rest of the world and Rule #2: Invest where you shop. Another key to investing is to make sure that the company you are investing in has strong financial fundamentals. These include 1) low leverage, 2) strong profitability, and 3) room to expand into new markets.
Starbucks has all these things in abundance, yet I am confused as to why the stock (Nasdaq: SBUX) has declined in value from its high in March of almost $38 a share to about $35 a share as of yesterday, and why Alan Farley of The Street is calling Starbucks stock an excellent Short Sale opportunity.
Why I Buy Starbucks Coffee
There is a common misconception that Starbucks Coffee is too expensive for the average coffee drinker. If you consume 5-6 large coffees in a single day or if you cannot resist purchasing a Caramel Macchiato instead of black coffee, then you may be right. However, as a modest coffee drinker who enjoys a tall Pike Place black with a little sugar, a modest $1.61 in the morning is enough to get me through my day. I also enjoy the company at my local Starbucks, which is a small store on Main Street in my hometown. Its a favorite hangout for the local professionals, but its also a favorite place for families to bring their kids. My two (almost three) year-old likes to go for the Passion iced tea along with a Rice Crispy treat.
I have to admit, there are other places in town where I can get a cup of coffee that is just as good as Starbucks. Some charge a little more, some charge a little less. But one of the things that really attracts me to Starbucks over the competition is that I know that my purchase is going to more than just the profits of the company. Starbucks is a company that has always been dedicated to doing the right thing for the communities it serves as well as the world coffee trade.
Before Starbucks really took hold in the global coffee market, the international coffee market was a game where Third World coffee producers were horribly taken advantage of. While the demand for coffee was strong in the developed world, coffee can only be grown in the tropical regions of the third world where a combination of cheap land and cheap labor were in abundance. As small coffee farmers were driven out of business by large factory farms, many turned their fields to the only cash crop they had left to them the growing of cocaine and marijuana to the benefit of local drug lords and drug cartels. In an effort to provide the small farmer a better alternative, Starbucks introduced the concept of Fair Trade where they would agree to pay a sustainable price for the coffee provided that the farmer agreed not to use any of his/her fields for the growing of drugs. The program was so successful, that now Starbucks is expanding that concept to support coffee growers to use environmentally friendly and organic growing practices.
Another reason why I choose Starbucks is due to the companys dedication to being a responsible business here in this country. Each quarter, the company provides a Responsibility Report Card that details where the company stands on various projects, which focus on Community Service, the Environment, Diversity, and Wellness.
Why I Invest in Starbucks
If you were to evaluate a company based only on its stock price, you could conclude that Starbucks is a company that is struggling. Alan Farley says "Starbucks has been grinding sideways in a symmetrical triangle since March", and he expects that the stock price will go down to the low 30s by the end of May, which may be a great short sale opportunity for the shrewd investor.
For those of you who do not know, a short sale is a type of stock purchase where you make a profit if the price of the stock goes down rather than goes up. In other words, if you buy a stock via E-Trade, you hope that the price goes up. This is called "Buying Long" because we presume that you are planning to hold onto that stock for a long time. Short Selling is a bit more complex. In a Short Sale, what you do is you borrow a certain number of shares of a stock from a lender and then you immediately sell them in the market. On the date you have to return the borrowed stock, you buy them back from the market and return the shares to the lender. If the stock price went down, you earn a profit, if the price went up, you realized a loss. The short sale is a favorite tool for short-term investors and speculators in the market. Hedge funds do this sort of thing all the time. Some argue that short-selling does more harm than good because if too much of a companys stock is shorted at once, it becomes a self-fulfilling prophecy because the market tends to react to whatever is going on in the buys and sales of the stock regardless of what is actually going on in the company.
I now go back to the fundamentals of what makes for a strong company, which is my second tool of analysis when it comes to deciding what stock to purchase.
Low Leverage
Leverage is the accounting term for debt. Ideally, you would like to invest in a company with low debt. However, sudden increases in long-term debt may be a sign that the company is investing heavily in expanding operations. Starbucks Debt-to-Equity ratio for 2010 was approximately 14%, which is not bad.
Profitability
In 2010, Starbucks had it strongest year ever with Net Revenues of over $10.7 billion, which was a 9% improvement over 2009. Same-store sales growth was 13%, and their earnings per share was the strongest it had ever been.
Room to Grow
The Starbucks brand continues to be strong: (Highlights taken from Starbucks 2010 Form 10K available from the "Investor Relations" website)
In 2010, Starbucks successfully launched its Via brand instant coffee, which was an overnight success in Asian markets.
In 2011, the company plans to open 100 new locations in the United States and 400 new locations in China.
In January, Starbucks announced a deal with Green Mountain Coffee to market Starbucks products for its popular single cup coffee server. (If I were a betting person, I would think that a merger between Green Mountain & Starbucks is not out of the question.)
Seattles Best (Starbucks sister brand) is successfully finding new opportunities to market its products in vending machines and grocery chains all over the world.
In conclusion, for those of us "old school" investors out there who do their homework on the companies in which they invest, the Wall Street pundits who use their mathematical modeling to make their financial decisions miss out on the very reason why we should be investing in the first place. When we look at a company like Starbucks, we see a company with a good product, a clear mission to do good in the world, strong balance sheet fundamentals and potential for continued growth in the future.
Why would anyone want to bet against that?
Did you like this article? If you did, Thumb It! 7
thumbs so far
The views expressed
in this article are those of Bill Gee only and
do not represent the views of Nolan Chart, LLC or its affiliates.
Bill Gee is solely responsible for the contents
of this article and is not an employee or otherwise affiliated
with Nolan Chart, LLC in his/her role as a columnist.
Posted By: George Dance
Date: May 18, 2011 09:13:20 PM
Thanks for the informative article, Bill. It's a great reminder of the type of good that private companies are doing every day, as if led by an invisible hand.
Posted By: Bill Gee
Date: May 19, 2011 09:38:17 AM
Since the writing of this article, Starbuck's stock price has gone back above $37 a share, and "Business Insider" an industry trade publication, just reported a "Bullish" outlook for the company. The article cites many of the same points I made in this article so it's nice that someone was paying attention.
